Harneys Insights - Articles, Guides and Legal UpdatesWed, 06 Jun 2018 22:40:36 +0100Fri, 13 Sep 2019 00:00:00 +0100 https://www.harneys.com/insights/
Data Protection in the Cayman Islands
Fri, 13 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/data-protection-in-the-cayman-islands/
http://www.harneys.com/insights/data-protection-in-the-cayman-islands/
The Cayman Islands Data Protection Law comes into effect on 30 September 2019. All in scope entities need to ensure they are ready for the commencement of the Cayman Islands new data protection regime. This legal guide provides an overview of how the new regime will operate and what in scope entities need to prepare for the new regime.]]>
SOS Substance on Substance: Episode seven – Holding Business and Finance and Leasing Business
Wed, 11 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-seven/
http://www.harneys.com/insights/sos-substance-on-substance-episode-seven/
In the seventh instalment of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot give an update on timing of the ITA Code and consider some FAQs around the “holding business” and “finance and leasing business” definitions.

Phil and Josh discuss the “holding business” and “finance and leasing business” definitions under the economic substance legislation and provide some practical examples of how Harneys considers the law will be applied in practice.

Click below to listen.

Key takeaways:

We are waiting for the International Tax Authority (ITA) to publish its final Code. We understand the enabling legislation required for this to happen has been read in the BVI House of Assembly, and should appear in the official Gazette soon. The Code will then be released by the ITA.

We are receiving a number of queries regarding how to apply the narrow “pure equity holding entity” definition. Very broadly, Harneys’ view is that:

Reading the definition purposively, a current account (whether or not it is interest-bearing) which is operated to receive dividends or capital gains and to pay the entity’s expenses should not be viewed as taking an entity outside the definition

Conversely, having a bank account which holds significant cash sums received from other sources of income, generates interest or holds sums of a significant value in proportion to the value of the equity participations held by the entity (for example, as part of a broader reinvestment or working capital strategy) may mean that the narrow definition is not met

The majority of brokerage accounts held by BVI entities that we have encountered are not of a type which would bring the entity within the narrow definition of “holding business”

Many people are also asking how to apply the “finance and leasing business” definition. This is a highly complex area and the definition is very broad on its face – if you are in doubt, please speak to a lawyer. It is worth noting though that it is the current Harneys’ view that many simple intercompany debt arrangements which are non-interest bearing are unlikely to constitute a “finance and leasing business”.

Stay tuned for more Substance on Substance.

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Transfers in and out of the Cayman Islands
Mon, 09 Sep 2019 15:51:18 +0100
http://www.harneys.com/insights/transfers-in-and-out-of-the-cayman-islands/
http://www.harneys.com/insights/transfers-in-and-out-of-the-cayman-islands/
One of the reasons why the Cayman Islands is a leading offshore jurisdiction is the flexibility of its companies and partnership legislation. This includes the ability of vehicles formed or registered outside of the Cayman Islands to transfer into the Cayman Islands by following a simple transfer procedure.

On transferring they are registered as an exempted company, limited liability company (LLC) or exempted limited partnership (depending on their legal form before the transfer) under processes that exist under the Companies Law, the Limited Liability Companies Law (LLC Law) and the Exempted Limited Partnership Law (ELP Law). Cayman Islands exempted companies, LLCs and exempted limited partnerships are also able to de-register and transfer out of the Cayman Islands into another jurisdiction.

This guide provides a general overview of the process for transfers in and out of the Cayman Islands.

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Segregated portfolio companies in the Cayman Islands
Mon, 09 Sep 2019 15:18:32 +0100
http://www.harneys.com/insights/segregated-portfolio-companies-in-the-cayman-islands/
http://www.harneys.com/insights/segregated-portfolio-companies-in-the-cayman-islands/
Any Cayman Islands exempted company (the most common Cayman corporate vehicle limited by shares) may be registered as a segregated portfolio company (an SPC) under the Cayman Islands Companies Law (Companies Law). Registration as an SPC can be made either on incorporation of the company or subsequently.

The concept of an SPC is that the relevant company, which remains a single legal entity, may create separate segregated portfolios (each, a Portfolio) with the assets and liabilities of each Portfolio being statutorily ring-fenced from the assets and liabilities of each other Portfolio and the general assets and liabilities of the company. Income and other property of an SPC that is not attributable to any Portfolio constitute the general assets of the company.

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Are you ready for Data Protection in the Cayman Islands?
Mon, 09 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/are-you-ready-for-data-protection-in-the-cayman-islands/
http://www.harneys.com/insights/are-you-ready-for-data-protection-in-the-cayman-islands/
The Cayman Islands Data Protection Law (DPL) comes into effect on 30 September 2019.

Anyone who falls within the definition of a “data controller” must now comply with eight data protection principles in relation to any personal data processed by the data controller. Where a data controller engages a third party (a data processor) to process personal data on its behalf, the data controller must ensure the third party complies with the eight data protection principles.

The eight data protection principles are:

Fairness and lawfulness

Purpose limitation

Data minimisation

Accuracy

Storage limits

Accountability and respect of rights of data subject

Integrity and confidentiality (security)

International transfers

The DPL also sets out the rights of individuals to control their personal data and implements a system to protect against the misuse of personal data.

The DPL is similar to the General Data Protection Regulation (GDPR) with which many clients will be familiar.

Do I need to comply with the DPL?

You must comply with the DPL if you are a data controller that is a Cayman Islands company or partnership, a foreign company registered in the Cayman Islands or a business operating in the Cayman Islands that processes personal data in the context of being established in the Cayman Islands. The individual to which the personal data relates does not need to be in the Cayman Islands or a citizen of the Cayman Islands.

If you are a data controller that processes personal data in the Cayman Islands, regardless of where you are established, then you must also comply with the DPL and appoint a local representative.

Am I a data controller?

Data controllers determine the purposes, conditions and manner in which any personal data are processed or are to be processed. Personal data is any type of data that can be used to identify an individual.

Are there any exemptions/safe harbours?

There are exemptions from the requirement to comply with some or all of the data protection principles such as for the purposes of safeguarding national security, investigation of crime and legal professional privilege. Any exemption must be assessed on a case by case basis.

Does a Cayman Islands investment fund have to comply with the DPL?

Yes, in nearly all instances.

What do I need to do to comply with the DPL?

If you are within scope of the DPL then you must:

Prepare a privacy notice to give to individuals to explain how you will process, use and retain their personal data

Review your procedures to ensure the manner in which you process and retain personal data complies with the DPL and that you are able to retrieve specific personal data if requested to do so by a data subject or a relevant authority

You may need to adopt a data processing, protection and retention policy

If you engage a third party to process data on your behalf you will need to ensure there is a written contract for such engagement that addresses your obligations under the DPL, including any transfer of data outside of the Cayman Islands

A Cayman Islands investment fund will therefore need to:

Send the privacy notice to existing investors on or around 30 September 2019

Update subscription documents to include a privacy notice for new investors

Update offering documents to reflect the new requirements under the DPL

Update agreements with any third parties that process personal data on behalf of the fund to ensure such processing is undertaken in compliance with the DPL especially where there is transfer of data outside of the Cayman Islands

What are the penalties for breach of the DPL?

There are material financial penalties for persons that breach the DPL ranging from CI$10,000, to CI$250,000 and possible terms of imprisonment for up to five years. Unlike the GDPR, the penalties under the DPL are fixed rather than based on turnover.

Where an offence under the DPL is committed with the consent of any director, manager, secretary or similar officer of an entity then such person may also be liable for the applicable penalty.

Are there any DPL guidance notes?

The Cayman Islands supervisory authority for the DPL, the Office of the Ombudsman, has issued a Guide for Data Controllers to explain how the Office of the Ombudsman will likely interpret various provisions of the DPL. The guide is largely based on the United Kingdom’s Information Commissioner’s Office’s Guide to the GDPR and is a very useful starting point for information.

Please contact your usual Harneys representative if you would like advice on compliance with the new data protection regime in the Cayman Islands. If you have any other questions, visit harneys.com/Cayman.

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Continuations out of the Cayman Islands
Mon, 09 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/continuations-out-of-the-cayman-islands/
http://www.harneys.com/insights/continuations-out-of-the-cayman-islands/
One of the reasons why the Cayman Islands is a leading offshore jurisdiction is the flexibility of its companies and partnership legislation. This includes the ability of Cayman entities to transfer out of the Cayman Islands and move to another jurisdiction, by following the relevant procedure.

This guide looks at the process for transferring exempted companies, limited liability companies (LLC) and exempted limited partnerships out of the Cayman Islands by way of continuation.

Which entities can de-register and transfer out of Cayman?

Under the Companies Law, an exempted company incorporated in the Cayman Islands, with limited liability and a share capital, can apply to be de-registered from the Cayman Islands and transfer to another jurisdiction, by way of continuation.

An LLC registered under the Limited Liability Companies Law (LLC Law) which proposes to be registered by way of continuation as a foreign entity in a jurisdiction outside Cayman, can apply to be de-registered from the Cayman Islands.

The general partner of an exempted limited partnership under the Exempted Limited Partnership Law (ELP Law) which proposes to be registered by way of continuation as a partnership, body corporate or any other form of entity under the laws of a jurisdiction outside Cayman, may apply to be de-registered as an exempted limited partnership in the Cayman Islands.

What is the process?

The process is very similar for exempted companies, LLCs and exempted limited partnerships and the registrar will de-register an applicant if:

It proposes to be registered by continuation in a jurisdiction which permits or does not prohibit the transfer.

The application fee of three times the applicant’s annual fee is paid. For exempted companies, the level of annual fees depends on the authorised share capital of the company. Please contact us for details of the current government fees.

The applicant has filed notice of any proposed change in its name, change in the partnership (for an exempted limited partnership) and its proposed registered office in the jurisdiction it is transferring into.

The application for de-registration is not intended to defraud its creditors (or limited partners for exempted limited partnerships).

Any contractual consent to the transfer has been obtained, waived or released.

That the transfer is permitted by and has been approved in accordance with the applicant’s constitutional documents (memorandum and articles of association for an exempted company, LLC agreement for an LLC, partnership agreement for an exempted limited partnership).

That the laws of the jurisdiction where the applicant is transferring to have been or will be complied with and the applicant will on registration in the relevant jurisdiction continue as a body corporate limited by shares (for an exempted company) / as a foreign entity on its registration in the new jurisdiction (for LLCs) / as a partnership, body corporate or other form of entity on its registration in the new jurisdiction (for exempted limited partnerships).

For LLCs, the affidavit / declaration must also include confirmation that it proposes to be registered by continuation in a jurisdiction which permits or does not prohibit the transfer and if the applicant is licensed or registered with the Cayman Islands Monetary Authority (CIMA) it has obtained CIMA’s consent to the transfer.

If a director / authorised signatory makes a declaration without reasonable grounds, they commit an offence and are liable on conviction to a substantial fine and / or five years imprisonment.

The declaration or affidavit must also include a statement of the assets and liabilities of the applicant made up to the latest practicable date before making the declaration.

The applicant must also file an undertaking confirming that notice of the transfer has been or will be given within 21 days to its secured creditors.

If the exempted company is licensed under the Banks and Trust Companies Law or the Insurance Law, it must obtain consent to the transfer from CIMA. If an exempted limited partnership is licensed with CIMA it must also have obtained CIMA’s consent to the transfer. If an LLC is licensed or registered with CIMA it must obtain CIMA’s consent to the transfer and include confirmation of this in the affidavit / declaration of an authorised signatory.

The registrar is not aware of any other reason why it would be against the public interest to de-register the applicant.

The LLC Law and ELP Law also require that the applicant must be in good standing with the registrar, having paid all outstanding fees. In practice exempted companies applying to de-register under the Companies Law must also be in good standing with the registrar.

What happens once de-registration is confirmed?

On de-registration, the registrar will issue a certificate confirming de-registration as an exempted company / LLC / exempted limited partnership and the date of de-registration. If the application is made on an express basis (and an express fee paid) the certificate can be issued on the same day as the application is made, to provide comfort that the applicant has been de-registered in Cayman on the same day as it registered in its new jurisdiction. From that date an applicant which is an exempted company ceases to be a company under the Companies Law and continues as a company under the laws of its new jurisdiction, an LLC ceases to be an LLC under the LLC Law and continues as a foreign entity under the laws of its new jurisdiction and an exempted limited partnership ceases to be such under the ELP Law and continues as a partnership, body corporate or other entity under the laws of its new jurisdiction.

The registrar gives notice of the de-registration in the Cayman Islands Gazette confirming the jurisdiction that the entity has transferred to and its new name, if it has changed.

De-registration of an exempted company / LLC / exempted limited partnership does not create a new legal entity, affect the property of the applicant, affect any resolutions passed or any rights or obligations it enjoyed while it was an exempted company / LLC / exempted limited partnership in Cayman or affect any legal proceedings to which it is a party.

Next Steps

As well as compiling and filing the documents described above, good coordination between the lawyers in the entity’s proposed new jurisdiction and the Cayman Islands is key to a successful continuation out of the Cayman Islands.

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Key Benefits of Cayman Islands Structures
Mon, 09 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/key-benefits-of-cayman-islands-structures/
http://www.harneys.com/insights/key-benefits-of-cayman-islands-structures/
Companies incorporated in the Cayman Islands are amongst the most popular offshore holding structures in the world. Whilst offshore vehicles are used for a wide variety of different purposes globally, there are a number of common factors which feed into the success of the Cayman product. Cayman vehicles are most commonly used in company or partnership-based fund arrangements formed by using companies or partnerships, but holding company structures and Cayman trusts are also popular. This guide outlines the key benefits of Cayman Islands structures. Download the PDF to read more.]]>
The roles and responsibilities of the AML Officers of Financial Service Providers
Mon, 09 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/the-roles-and-responsibilities-of-the-aml-officers-of-financial-service-providers/
http://www.harneys.com/insights/the-roles-and-responsibilities-of-the-aml-officers-of-financial-service-providers/
Money laundering is the process by which the proceeds of crime are channelled through the economy/financial system in a way which is intended to conceal the true origin and ownership of the proceeds of criminal activity. This guide looks at the roles and responsibilities of the nominated officers of FSPs whose job it is to look out for and report suspicious activity and who oversee the compliance function and ensure that adequate systems and controls are in place to comply with the Regulations. Download the PDF to read more.]]>
Estate planning for Asian clients in the Cayman Islands and the BVI
Thu, 05 Sep 2019 00:00:00 +0100
http://www.harneys.com/insights/estate-planning-for-asian-clients-in-the-cayman-islands-and-the-bvi/
http://www.harneys.com/insights/estate-planning-for-asian-clients-in-the-cayman-islands-and-the-bvi/With an increase in Asian family wealth, it is no longer an option for Asian clients to avoid succession planning. In this article, we explore the solutions offered in the British Virgin Islands (BVI) and Cayman Islands, and how these options can be tailored to meet Asian clients’ needs.

Common concerns

Although offshore trust structures are a popular solution, many Asian clients still find the concept of a trust – a creature of common law – difficult to understand. Common concerns include relinquishing ownership and control, confidentiality, and costs. As a result of a simple lack of understanding, misleading information, or claims spread through the web and social media, Asian clients may request a specific type of trust in a certain jurisdiction without having sought preliminary tax or relevant legal advice, or to have unrealistic objectives for their proposed trust structure.

Wills

Asian clients with BVI assets who are uncomfortable with trust arrangements may instead opt to execute a will to ensure that their BVI estates are distributed according to their wishes. However, not all clients appreciate the advantages in having a BVI will (specifically governing their BVI assets) in addition to a foreign will (governing non-BVI assets). Many of them are unaware that the probate process can be expedited with a BVI will, but have not been advised that forced heirship laws in their home jurisdiction may override a disposition by will.

Popular solutions in the BVI and Cayman Islands

The BVI and Cayman Islands are two of the most popular offshore trust jurisdictions for HNWIs, offering a number of solutions that can be tailored to address the needs of Asian clients. For example, trusts laws in both jurisdictions1 permit a wide range of powers to be reserved by a settlor of a trust (or granted to others, such as a protector) without affecting the trust’s validity. Reserving power to the settlor or a trusted associate or family member can go a long way to appease the concerns of Asian clients. However, reserving too much power might lead to a challenge to the trust in another jurisdiction2. In the BVI, the VISTA regime develops the reserved power provisions further by disengaging the trustee from the management of the underlying trust assets, and removing the trustee’s fiduciary responsibility in respect of theassets.

Private trust companies (PTCs) in the BVI and Cayman Islands offer particularly family-friendly solutions to Asian clients who are hesitant about transferring substantial wealth and control of the family business to a third party trustee, and concerned about the annual maintenance costs of a trust. However, PTCs tend to lose their appeal when clients are advised of the fiduciary duties and requisite standard of care imposed on PTCs, and the extra costs associated with a purpose trust or foundation holding the shares of the PTC3.

Asian clients who wish to set up trusts for specific purposes, e.g. the continuance of the family business, have found non-charitable purpose trusts in both jurisdictions4 appealing. STAR Trusts – a specific feature of the Cayman Islands – offer Asian clients another option for dynastic or multi-generational succession planning. The right to enforce the trust (i.e. to bring a claim against the trustee) is given to the enforcer alone5, which provides a certain level of comfort to Asian settlors concerned about disgruntled beneficiaries.

Cayman Islands foundation company – the new solution?

Introduced by The Foundation Companies Law 2017, Cayman foundation companies (CFCs) offer Asian clients another alternative for succession planning. Unlike trusts, CFCs enjoy separate legal personality. Capable of existing indefinitely, the distinguishing features of CFCs are their orphaned nature, and the ability to entrench their objects.

Being an orphaned and ownerless entity, a CFC does not need to have members6 whose interests may conflict with the wishes of the founder, and payment of dividends is prohibited7. Unless expressly stated, the governing documents of a CFC cannot be amended8, thus ensuring that the intentions of the founder will not be frustrated following his or her incapacitation or death. These features aside, the fact that a CFC is a corporate body also appeals to Asian clients who may use a CFC to hold the family business, as the composition of the CFC can mirror the board of existing family enterprises. Like non-charitable purpose trusts in the BVI and STAR Trusts in the Cayman Islands, the purpose of a CFC can be hybrid, thus dispensing with the need for separate structures to further both charitable and non-charitable aims of the founder. As interested persons will owe their duty to the CFC and not to any potential beneficiaries, CFCs are also useful when the asset portfolio consists of high-risk and less diversified assets.

As with BVI and Cayman Islands trusts, assets placed into CFCs are protected by ‘firewall’ legislation9.

Whether CFCs are the new solution for Asian clients will, however, ultimately boil down to the preference and needs of the client. A CFC is capable of achieving many things that a trust can achieve and can be customised, but it also comes with certain requirements that may be perceived by Asian clients as shortcomings, such as registration on incorporation and annual government maintenance fees10.

Conclusion

Professional guidance and careful thought are required when it comes to estate planning. Whilst the BVI and Cayman Islands offer various solutions that can be tailored to meet Asian clients’ needs, deciding on which solution to employ is an intricate exercise of balancing the need to meet clients’ objectives with the need to manage their expectations. Being too accommodating to a client’s needs in retaining excessive control can jeopardise a trust, and the entrenchment of objectives can make a CFC too rigid to be an effective dynastic vehicle. Advisors must take a holistic approach in understanding and addressing each client’s concerns, and set parameters to ensure the integrity of the structure is not undermined.

[3] For succession and tax purposes, it is recommended that the shares in PTCs be held in a standalone purpose trust or foundation;

[4] BVI: section 84A of the Trustee Act – purposes must be specific reasonable and possible; must not be immoral, contrary to public policy or unlawful; Cayman: Part VIII of the Trusts Law (STAR trusts) – objects may be persons or purposes or both, and purposes may be of any number or kind, charitable or non-charitable, provided that they are lawful and not contrary to public policy;

any appointment or resignation of a director/manager must now be filed with the Cayman Islands Registrar of Companies within 30 days

the register of members for a company limited by shares must now clearly record whether or not shares have voting rights (and if they are conditional)

the penalties for failing to establish or maintain a beneficial ownership register or failing to comply with, or provide information required by, notices have significantly increased

the Registrar of Companies will now provide any information lawfully requested from it by Cayman Islands regulatory and financial crime authorities

the names of the current directors/managers of a company will be made available for inspection by the Registrar of Companies at a future date

When will the names of the current directors / managers be made available and how?

The provisions relating to making names of the current directors / managers of a Cayman Islands company available through an online portal is not yet in force and requires a further order of Government to come into force at a future date. Our expectation is that this will be managed through an online portal made available on the Registrar’s website. A fee of CI$50 will be payable in order to inspect the list.

When do I need to update the register of members to reflect voting rights?

Companies incorporated or registered on or before 8 August 2019 have until 7 February 2020 to ensure their register of members is updated. Companies incorporated or registered after 8 August 2019 have until 7 November 2019 to update their register of members.

How do I arrange for the register of members to be updated to reflect voting rights?

Harneys Fiduciary will be contacting all relevant registered office clients to request the information needed to update their register of members to reflect the voting rights. For a typical company limited by shares with a single class of shares, all shares will have voting rights and that is the information that will be required to be noted on the register. For investment funds, many of which will issue a single class of voting shares to its investment manager and will issue non-voting shares to its investors, that is the information that will be required to be shown on the register. Funds should contact their fund administrator to ensure that this is being done.

What are the penalties for failing to update the register of members?

Failure to record the proper and correct information in the register of members can incur a penalty of CI$5,000 for both the company and any director or manager who knowingly and wilfully authorises or permits such default.

What are the penalties for breaching the beneficial ownership requirements of these laws?

A company that knowingly and willfully fails to comply with the beneficial ownership register requirements (for example by not providing details of its beneficial owners on its register) is liable on conviction of a first offence to a fine of CI$25,000 and on conviction of a second offence to a fine of CI$100,000. Where a company is convicted of a third offence the company may be struck off the register of companies by the Cayman Islands Court.

A failure to comply with notices or provide information under the beneficial ownership regime incurs a penalty of CI$25,000 for conviction of a first offence and CI$50,000 and/or imprisonment for two years for conviction of a second offence.

For further information about any of these recent changes please contact your usual Harneys representative.

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Luxembourg beneficial owners register: deadline extended to 30 November 2019
Fri, 30 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/luxembourg-beneficial-owners-register-deadline-extended-to-30-november-2019/
http://www.harneys.com/insights/luxembourg-beneficial-owners-register-deadline-extended-to-30-november-2019/
The deadline for the registration of beneficial owners through the Luxembourg RBE portal has been extended from 31 August 2019 to 30 November 2019.

All Luxembourg legal entities registered with the Luxembourg Trade and Companies Register, including common funds (FCPs) and Luxembourg branches of foreign companies are required to provide up to date information on their beneficial owners. While listed companies are also covered, they will only be required to provide information regarding the stock exchange on which they are listed.

Registration must be completed by the deadline in order to avoid criminal fines resulting from a breach of the RBE Law and to benefit from a free-of-charge filing.

For more information on the Luxembourg register of beneficial owners read Harneys' guide here.

The Cayman Islands is home to a modern and thriving investment funds industry with an estimated 75 per cent of the world’s offshore hedge funds and almost half of the estimated US$1.1 trillion of assets under management.

The directors at the helm of these funds typically benefit from contractual limits on, and indemnity against, the liability that might otherwise follow any shortcomings in their performance. These contractual provisions seek to strike a balance between giving directors the comfort to perform their roles robustly but without offering refuge for acts of an egregious nature. Nebulous terms such as ‘gross negligence’ or ‘willful default’ (to name a few) signpost the line of demarcation but what these terms mean is usually not obviously discernible.

This article discusses the rationale for these director protections, their structure and meaning, and some practical tips for directors when accepting an appointment to the board of a Cayman Islands fund.

Contractual allocation of risk

Risk allocation is a fundamental function of any contract, although the parties may not always consider it in those terms. For example, a contract for the sale of goods would usually specify the point in time at which title passes from the vendor to the purchaser – a point which may not necessarily correlate with either the taking of possession of the goods by the purchaser or with payment to the vendor.

The contractual limits or exclusions of liability, indemnities, exculpations, waiver of claims and variations of the same that appear in the articles of association of a Cayman Islands fund or director services agreements are the mechanisms for allocating risk in the context of investment funds.

These risk allocation provisions facilitate Cayman Islands funds to engage the skills and experience of independent professional directors at a relatively small cost compared to what otherwise might be sought by directors who face uncertain and unlimited liability in the performance of that function.

A recent decision of the Cayman Islands court has recognised that the global market for Cayman Islands investment funds depends on the availability and cost of independent professional directors and that indemnity provisions should be construed with that in mind.

Striking the balance

Unlike many other jurisdictions, there is no statutory restriction or regulation of limitation of liability or indemnity clauses in the Cayman Islands where (subject to limited exceptions) the law respects the rights of contractual counter parties to strike their own bargains. The exceptions include fraud and breach of a director’s core fiduciary duties to the company.

A party cannot contract out of the consequences of his or her own fraud for obvious public policy reasons and it follows that a director will not be able to rely on limitation of liability or indemnity clauses in relation to the director’s fraud regardless of whether the term ‘fraud’ appears in those clauses. Liability for breach of a core fiduciary duty cannot be excluded under equitable principles of the common law.

Left to their own devices, it is entirely for the directors and the fund to determine between themselves who will bear the risk of loss where a director fails to perform his or her function to the requisite standard. On the one hand, the fund wants to attract the reasonably priced services of professional directors to perform their functions commercially and robustly without constantly looking over their collective shoulders for fear of their own personal position.

The fund’s objective to maximise returns to investors does not sit easily with director liability. While fund failure is relatively rare, it does of course happen and the consequences are severe. On the other hand, for obvious reasons, a fund cannot offer blanket insulation from accountability.

As to where and how to draw the line, the approach uniformly adopted in the Cayman Islands fund industry is to offer umbrella protection subject to carve outs. The preferred formulation of those carve outs tend to be ‘fraud’, ‘gross negligence’, ‘willful default’ or ‘willful neglect’. As discussed below, these terms are not interchangeable – each has its own distinct meaning and captures a distinct form of behavior – yet it is very rare for all of these terms to be utilised in a singular clause.

A director who took the time to look for a definition of these terms in the fund’s articles of association would not usually find one. Experience suggests that a director may, in any event, do no more than check for the existence of limitation of liability and indemnity clauses that resemble a familiar – if not boilerplate – form in any event and does not engage with the specific terms of demarcation between liability and protection.

The proliferation of and apparent indifference to these terms might seem quite surprising given that they are not used in everyday commerce and do not have an obviously discernible meaning, including to many lawyers familiar with the investment funds industry.

It is usually only in the aftermath of a fund’s collapse that the meaning of these terms are considered under the harsh spotlight of the insolvency regime by the fund’s liquidators, directors and other stakeholders and their army of lawyers with a view to making or defending claims against directors, auditors and other service providers.

The precise meaning of these terms may well be litigated for many years afterwards and to the tune of millions of dollars. The litigious liquidations of several Cayman Islands-domiciled Madoff feeder funds continue to wind their way through the appellate courts some 11 years after the fraud was initially revealed: a recent decision of the Cayman Islands Court of Appeal considered whether the administrators and custodian of one such feeder fund had been ‘grossly negligent’ such that they could not avail themselves of the contractual protections from claims for negligence and breach of contract.

When tasked with determining high-value claims that hinge on the meaning of these terms, the courts have been careful to emphasise that they must be construed in the context of the documents in which they appear and that whether an act falls on one side of the line or the other will always be a fact sensitive analysis. These terms have eluded formulaic definition over the years and evolve with the times. Modern cases trace back to somewhat charming disputes about ship building or the 1877 English decision that considered whether the packing of Cheshire cheese by London railway men who, unlike Cheshire railway men, were unfamiliar with Cheshire cheese and the particular way it had to be packed to survive the train trip, comprised ‘willful misconduct’ by the London railway men.

The meaning of ‘gross negligence’ was recently revisited by the Cayman Islands Court of Appeal in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Limited (unreported, 13 June 2019). The Court explained that ‘gross’ negligence is simply negligence that is “very great”, “extreme” or “flagrant” or arises “by some really elementary blunder” – it is a question of degree, rather than a separate category, of negligence.

Acts of an advertent nature might fall within the carve out for ‘willful neglect or default’ if the director either acts (1) knowing he is committing and intends to committee a breach of duty or (2) is recklessly careless in the sense of not caring whether the act is a breach of duty (Peterson and Ekstrom v Weavering Macro Fixed Income Fund (2015).

The courts have considered there to be little difference between ‘fraud’ and ‘dishonesty’, comprising a two-step analysis of (1) what is the director’s state of mind and (2) whether the conduct is dishonest by the standard of ordinary, decent people.

Directors may take comfort from the fact that cases concerning these terms in the context of claims against directors are rare and instances where directors have been found to fall foul of the boundary rarer still. The terms are deployed to capture only the most egregious acts and failures and as such the scales of drafting are weighed heavily in favour of directors.

Practicalities

Bearing in mind that the articles of association of the fund are a contract between the investors inter se and the fund (but not with its directors), directors should take care to ensure that the protections contained in the articles are incorporated into the director’s own contract with the fund.

Ideally and for the avoidance of any doubt, those protections should be expressly incorporated into a services agreement although the Courts have recognised the incorporation of the articles where there is extraneous evidence that the director was appointed ‘on the footing’ of those articles – for example, an email chain where the director had specific regard to the existence of indemnity provisions in the articles before accepting the appointment.

Directors should also look to fill in any gaps in the articles through their own contracts with the fund. For example, a director services agreement may contain a mechanism for the upfront payment of the director’s legal costs, putting into practical effect the more general principle that an indemnified party is never called upon to put his hand into his own pocket. Service agreements can also be used to rectify deficiencies of a more fundamental nature – for example, where the indemnity may not cover all foreseeable loss or may not cover a director who leaves office.

This article was original published by Commercial Dispute Resolution.

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SOS Substance on Substance: Episode six - what should directors be doing now?
Thu, 29 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-six/
http://www.harneys.com/insights/sos-substance-on-substance-episode-six/
In the sixth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot examine good governance principles for BVI entities in the context of the classification process and what entities should be doing now in light of their statutory obligations.

Phil and Josh discuss the release of the BVI Economic Substance Code (the Code) and the responsibilities of directors of BVI companies.

Click below to listen.

Key takeaways:

The House of Assembly postponed the second and third reading of the Beneficial Ownership Secure Search System (Amendment) No 2 Act, 2019 due to Hurricane Dorian; they will meet next week to pass the law into effect

Following on from that, the International Tax Authority (ITA) will then finalise the Code

The day-to-day responsibility for managing the business and affairs of BVI companies falls on their directors, who are subject to various statutory and fiduciary duties – as such, they need to ensure they have classified their company and understood its obligations under the economic substance law as the first compliance periods have started and there are potentially onerous consequences for non-compliance

There are provisions in the BVI Business Companies Act 2004 (BCA) which broadly allow directors to rely upon expert advice when discharging their duties

The ITA has made it clear that it will expect to see robust documentary evidence of the basis of the entity’s classification, such as a formal memo of legal advice on the classification and/or board resolutions (the latter will typically be provided to the registered agent in some form as part of instructing it to make the relevant filings under the BOSS system)

There are existing statutory obligations under the BCA for BVI companies to keep records and underlying documents that enable the financial position to be determined at any point in time with reasonable accuracy – this includes a statement of assets and liabilities and records of receipts and expenditure. If the ITA is unable to determine a clear basis for the classification, there is a risk that companies (or their registered agent, directors or other functionaries) may incur additional scrutiny in the event of an ITA investigation if they are unable to produce the required evidence promptly on request

Stay tuned for more Substance on Substance.

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Changes in offshore M&A - Buyer be aware
Thu, 29 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/changes-in-offshore-ma-buyer-be-aware/
http://www.harneys.com/insights/changes-in-offshore-ma-buyer-be-aware/
George Weston, Philip Graham and Matt Taber discuss the practical impact of recent legislation in the British Virgin Islands and the Cayman Islands on offshore M&A transactions. This article was first published in the September 2019 issue of PLC Magazine. Download the PDF to read more.]]>
SOS Substance on Substance: Episode five
Thu, 22 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-five/
http://www.harneys.com/insights/sos-substance-on-substance-episode-five/
In the fifth episode of Harneys’ Substance on Substance series, Philip Graham and Joshua Mangeot confirm that the first economic substance (ES) compliance “financial period” has commenced for all BVI companies and other relevant legal entities and also address some common misunderstandings regarding the ES timetable.

Phil and Josh discuss the release of the finalised International Tax Authority (ITA) ES Code, confusion on classification and compliance deadlines, and to which types of entity the ES requirements apply.

Click below to listen.

Key takeaways:

The final form of the ITA Code is known and it should be available for formal release to the public by the end of August (as it requires enabling legislation)

The BVI ES legislation had immediate effect from 1 January 2019 for companies or limited partnerships with legal personality incorporated or registered in the BVI (legal entities) on or after that date

There was a grace period until 30 June 2019 for legal entities existing before 1 January 2019 – this has not been extended

As a result every legal entity is now in its first compliance “financial period” and needs to have classified its activities

There have been references to an October date but this point is of narrow application and relates to a delay to some new reporting obligations – it was not a change to the commencement dates for legal entities’ “financial period”

All BVI legal entities should be classified regardless of whether they are perceived to be out-of-scope – “nil returns” will be required in 2020

Based on statements by the ITA regarding the exercise of its investigation powers, entities should maintain a robust written record of the basis of their classification

Affected legal entities with relevant activities (which are not “non resident” for tax purposes) should be taking steps to become compliant or reorganise themselves if the ES requirements necessitate it

Stay tuned for more Substance on Substance.

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Trustees of Cayman Islands trusts now required to maintain trust records
Thu, 22 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/trustees-of-cayman-islands-trusts-now-required-to-maintain-trust-records/
http://www.harneys.com/insights/trustees-of-cayman-islands-trusts-now-required-to-maintain-trust-records/The Cayman Islands Trusts Law has been amended for the second time in 2019, with the introduction of a statutory obligation on trustees to maintain and keep up-to-date certain trust records. In particular, trustees are now obliged to keep records about trust parties (settlors, beneficiaries, protectors, etc) as well as any other person exercising ultimate effective control of a trust. Trustees now also have a statutory obligation to maintain trust accounts. These obligations are imposed on trustees of all Cayman Islands trusts, irrespective of the location of the trustee.

The Trusts (Amendment) (No. 2) Law (Amendment Law) has also empowered the Cabinet to make regulations to give effect to the purposes of the Trusts Law. The Cabinet has since published the Trusts (Transparency) Regulations (Regulations), prescribing the precise information that trustees are required to keep and specifying thata trustee must maintain records of such information for a period of 5 years after the trustee ceases to be the trustee of the relevant trust. The Regulations also confirm that a trustee who fails to comply with these requirements without reasonable excuse commits an offence that attracts a fine of $5,000.

The Amendment Law has also empowered Cayman Islands’ authorities charged with combatting money laundering and terrorism financing to direct that a trustee or other person exercising ultimate effective control over a trust provide information about the trust to the authority if the authority has reasonable grounds to believe that the trustee or controlling person is acting in contravention of certain financial crime prevention laws enacted in the Cayman Islands, including the Proceeds of Crime Law. The Regulations confirm that a trustee is expected to maintain records in such a manner that will enable the trustee to comply with such a direction within 48 hours. A person who knowingly fails to comply with a direction to provide information commits an offence that attracts a fine of up to $100,000.

For information about the amendments made to the Trusts Law earlier this year, see ourblog postfrom May 2019.

The Private Trust Companies Regulations have also been amended for the second time this year, expanding the record keeping obligations of a private trust company to include an obligation to keep records of the name and address of settlors and protectors, and enforcers ofSTAR Trusts.

Of the many client risks faced by financial institutions doing business today, one probably tops the growing list of reasons for Europe-based compliance officers to lose sleep at night: finding out that a client is named on the EU's consolidated sanctions list of persons, groups and entities subject to EU financial sanctions (sanctions list).

It can legitimately take the title of being the primus inter pares of compliance concerns and not just of the private sector but in many cases of regulators and competent authorities alike.

These worries have been brought into sharp focus following the steadily increasing use of listings by the world's two sanctions-designating superpowers: the United States and the European Union. Within the EU two events brought sanctions, or more precisely restrictive measures, into sharp relief: the 2011 Arab spring and Russia's annexation of Crimea in 2014.

What is the EU's sanctions list?

The sanctions list represents a vital component of the EU's aim to implement a unified and autonomous foreign policy, ie its common foreign and security policy (CFSP). In practical terms it operates effectively as a blacklist of those individuals, organisations and entities (designated persons) appearing on it.

In a rare example of extra-territorial reach, the list must be observed by EU citizens based anywhere in the world. The EU also works actively with third countries, even including the United States at times, to encourage the implementation equivalent and uniform sanctions lists.

How is the EU sanctions list produced and amended?

The EU is ultimately a rules-based structure, and as such the authority for the imposition of the list is contained in its founding treaties (more precisely, Article 29 of the Treaty on the European Union or TEU). In broad terms, restrictive measures are imposed for political rather than economic reasons, in essence to bring about a change in policy or activity by the target country, government, entities or individuals, in line with the objectives set out in the CFSP implementing legislation.

UN Security Council sanctions lists are included automatically within the EU's list but the EU additionally implements a vast number of extra designations far beyond those listed by the UN. In some cases, entirely new and autonomous sanctions regimes (and their lists) have been created where none exist at UN level for political reasons: those on Russia and Ukraine being prime examples.

Within the EU, its political wing, the Council, is responsible for the production and roll out of the lists. The Council's Working Party of Foreign Relations Counsellors (RELEX) deals with sanctions formation policy whereas the European External Action Service (EEAS), a form of foreign civil service of the Council, assists in the administration of the lists, including requests for corrections, amendments and delisting.

Implications of being listed

The immediate and direct consequence of being listed is that:

property and assets (very broadly defined),

which are owned or controlled (or held to the benefit of) by a designated person, and

which are based in, or subject to, EU jurisdiction,

must be frozen by all persons (not just financial institutions), and even including the designated persons themselves.

For a designated person to access frozen funding, even in order to pay for mundane expenses such as the weekly shop, a licence must be obtained from the competent authorities. The application for a licence must set out the precise grounds, in law, for the issuance of a licence. Obtaining a licence is not, however, straightforward for a designated person (or third parties) and can take many weeks or months.

Practical impact of the sanctions lists

From an institutional perspective, it may be far from clear whether the sanctions regime should apply, in particular, where the funds or assets of designated persons are mixed with non-designated persons. This can be particularly stark, for example, where a company is owned by a number of parties and only one is a designated party, in particular where the designated person is only a minority shareholder. To lawyers' delight it is impossible to avoid the complexity in many, possibly most, cases.

Added to this, there is relatively little that institutions can do to prevent ever dealing with a person that might, one day, end up on sanctions list. After all, clients may be the darling of the City and Wall Street one day but pariahs the next. This was seen in stark relief in the case of Libya where numerous blue-chip credit and financial institutions worked to be appointed by the country's sovereign wealth funds only to be required to freeze all assets following the fall of the Gaddafi regime in 2011.

In the light of the above, institutions now look to mitigate risks through increased intelligence gathering from third party platforms to better understand background information about counterparties, especially those based in emerging and frontier markets and in particular in relation to their source of wealth and financing.

Whereas in the past it may have been entirely acceptable for an institution to simply have an anti-money laundering (AML) policy in place, today's players will invariably implement detailed sanctions and anti-bribery and corruption policies and training alongside AML processes into their systems and controls.

From a transactional perspective the constant revisions and additions to sanctions lists mean that institutions now pay far greater attention to the drafting of sanctions clauses in contracts than ever before, the goal being to increase rights to exit an arrangement or else reduce liabilities following the onset of sanctions.

Recent developments in EU sanctions lists

In the beginning the EU created a consolidated list which was posted on its EUROPA website and updated from time to time. Institutions would either need to refer directly to the website on an ongoing basis or else engage third party intelligence providers who would compile the lists and distribute them onwards to paying customers.

In aid of boosting what are relatively rare cost saving measures for the compliance industry, the EU, through the European Commission's Financial Sanctions Files (FSF) service, has as of 5 July 2019 set up a revamped real time sanctions list notification service.

Unlike past lists on the EU's online portal, the new list is updated in real time. XML files are also generated via the FSF service to enable the financial institutions' IT systems to automatically "read" the EU's lists (admittedly, the precise way that the IT system does this is unfortunately beyond the understanding of the author). RSS feeds can deliver immediate notifications of changes to the list to all concerned.

It is expected that this increased cooperation between institutions and the EU database should lower, maybe even eliminate, the dreaded risk of the compliance department: the "false positive" requiring manual reconciliation by overworked personnel.

In a similar way and bearing in mind sanctions implementation in Europe is a patch-work of cooperation of national competent authorities (NCAs) alongside the EU institutions, the new developments would seem to lower the risk of old or out of date sanctions lists being replicated on official NCA website's around the continent. The safest bet for NCAs would seem to be to refer interested parties to the FSF service rather than recreating it.

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SOS Substance on Substance: Episode four
Wed, 14 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-four/
http://www.harneys.com/insights/sos-substance-on-substance-episode-four/
In the fourth episode of Harneys’ Substance on Substance series, Philip Graham and Josh Mangeot discuss the option of continuing a BVI entity out of the jurisdiction (sometimes called a “re-domiciliation” or “migration”) as a response to the economic substance legislation.

Episode Four

Phil and Josh discuss (a) the global trend towards adopting economic substance (ES) requirements, (b) the need to classify individual entities’ activities and tax status to determine whether they are subject to the BVI ES requirements at all, and (c) the importance of that classification and properly weighing the costs of compliance against the transaction costs and ongoing operating costs resulting from the proposed re-domiciliation.

Click below to listen.

Key takeaways:

Like any fundamental business decision, a re-domiciliation requires proper consideration of the transaction costs and other ongoing liabilities and obligations involved.

The key first step is to classify the BVI entity’s existing activities. Once entities are properly classified, in many cases they may discover that they:

do not have any “relevant activity” (and so are not subject to the ES requirements at all)

are an entirely passive “pure equity holding entity”, for whom the existing BVI registered agent and registered office arrangements may be adequate, or

can undertake simple reorganisational steps such that their business ceases to comprise any “relevant activity”, as defined.

Even where there is a “relevant activity”, many entities may be exempt from the ES requirements by virtue of their tax residence or tax status (ie, where the entity or the participators in the entity are chargeable to tax on the entity’s income under foreign tax laws).

Where proper classification has not been undertaken, we are seeing real-life examples of situations where entities may be incurring considerable expense and increases to their cost of business unnecessarily – in some cases based on a misunderstanding of the BVI requirements.

Compliance can be straightforward for many BVI entities. For some, their existing arrangements may be sufficient to comply with the legislation – in other cases, the changes required to achieve compliance are very simple and can be achieved without significant changes.

All reputable international financial centres are adopting ES requirements as required by the EU and OECD, whose Forum on Harmful Tax Practice group has confirmed the BVI’s legislation meets the global standard.

Stay tuned for more Substance on Substance.

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New mandatory disclosure rules – Directive 2018/822/EU
Tue, 06 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/new-mandatory-disclosure-rules-directive-2018822eu/
http://www.harneys.com/insights/new-mandatory-disclosure-rules-directive-2018822eu/
Tax transparency has been a hot topic on the agenda of governments worldwide following the introduction of anti-avoidance and transparency measures within the European Union.

The EU Economic and Financial Affairs Council reached an agreement, in March 2018, on the final draft of the Council Directive (EU 2018/822) which amends Directive 2011/16/EU on mandatory automatic exchange of information regarding reportable cross border arrangements.

Directive 2018/822/EU (DAC6) introduces a mandatory automatic exchange of information in the field of taxation in relation to reportable cross border arrangements and pursuant to DAC6, on 19 March 2019, the Cypriot Ministry of Finance circulated a draft bill (the Bill) which will be enacted into Cypriot national legislation by 31 December 2019. The Bill adopts the DAC6 and amends the existing Cypriot law on Administrative Cooperation in the field of taxation. Upon enactment of the legislation in Cyprus, guidance notes will be issued by the Cypriot tax authorities.

Pursuant to DAC6, cross border arrangements must be reported, as of July 2020, if they fall within one of a number of categories. These categories are:

commercial characteristics seen in marketed tax avoidance schemes;

structured arrangements seen in avoidance planning;

cross border transactions;

arrangements which challenge tax reporting and transparency; and/or

transfer pricing arrangements which are not at arm’s length.

Categories 1-3 above will apply only in cases where the “main benefit” test threshold is met. The threshold will be met where the tax advantage obtained constitutes the main benefit or one of the main benefits derived from the arrangement.

A number of challenges may arise under the new reporting obligations and determining whether there is a reportable cross border arrangement raises complex technical and procedural issues for taxpayers and intermediaries.

It is expected that the Cypriot Mandatory Disclosure Rules will be fully aligned to the text and the minimum requirements of DAC6. Official guidance will be issued by the Cypriot tax authorities to provide clarification on the interpretation of specific terms and provisions.

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OECD approves BVI and Cayman Islands economic substance regimes
Thu, 01 Aug 2019 00:00:00 +0100
http://www.harneys.com/insights/oecd-approves-bvi-and-cayman-islands-economic-substance-regimes/
http://www.harneys.com/insights/oecd-approves-bvi-and-cayman-islands-economic-substance-regimes/
Following months of continuous work overseeing the development of rules on so-called “economic substance” with some of the world’s top international financial centres, including the BVI and Cayman Islands, the OECD finally published the results of its review into the impact of low or zero tax jurisdictions on the global economy, released on 23 July 2019.

The review was conducted by the OECD’s Forum on Harmful Tax Practices (FHTP), which has now evaluated the new domestic laws of 12 zero or only nominal tax jurisdictions. For 11 of these jurisdictions (including Anguilla, the British Virgin Islands and the Cayman Islands) the FHTP concluded that the domestic legal frameworks adopted are in line with the standard and therefore “not harmful” to the global economy.

This is a welcome development in this brand new area of law and means that further material changes to the substance requirements in the BVI and the Cayman Islands are unlikely in the coming months when entities in those jurisdictions will be completing their substance analysis and, if relevant, implementing measures to comply with the relevant economic substance tests. The BVI Tax Information Authority is expected to finalise its Code in coming weeks (following the draft published on 23 April 2019) and the Cayman Islands Tax Information Authority has announced further guidance “3.0” before the end of Q4 2019.

From 2020, the FHTP review of the effectiveness of jurisdictions’ substance mechanisms will become annual.

Our experienced Regulatory Department is at the forefront of developments in this new area of law and available to assist in multiple regions and around the clock.

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Cyprus and Kazakhstan sign convention for avoidance of double taxation
Wed, 31 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/cyprus-and-kazakhstan-sign-convention-for-avoidance-of-double-taxation/
http://www.harneys.com/insights/cyprus-and-kazakhstan-sign-convention-for-avoidance-of-double-taxation/
On 15 May 2019, the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income (the Convention) was signed, in Nursultan, between the Government of Cyprus and the Government of Kazakhstan. Later, on 24 May 2019, Cyprus ratified the relevant double tax treaty it had signed with Kazakhstan (the DTT).

The Convention is based on the new OECD Model Convention for the Avoidance of Double Taxation on Income and on Capital (OECD Model Convention) and is expected to further contribute to the development of trade and economic relations between Cyprus and Kazakhstan, while bringing new opportunities and better protection for taxpayers in both countries. Kazakhstan is located in the heart of Eurasia and is a bridge between the East and West, therefore, this will further encourage investment from/to Europe and America through Cyprus. The Convention is also expected to regulate the exchange of banking and other information in line with Article 26 of the OECD Model Convention.

Below is a summary of the withholding taxes, as set out in the DTT:

Dividends – maximum five per cent withholding tax (WHT) on dividend payments where the recipient is a company that directly holds at least 10 per cent of the capital of the paying company, otherwise, the DTT provides for a maximum 15 per cent WHT rate on dividends. No WHT applies on dividend payments to non-Cyprus residents.

Interest – maximum 10 per cent WHT on interest payments, however, with regards to certain interest payments to the Government there is a zero per cent WHT rate on interest payments to non-Cyprus tax residents.

Capital gains – Cyprus retains the exclusive taxing rights on disposals of shares made by Cyprus tax residents, except in the following cases:

where non-listed shares derive more than 50 per cent of their value, directly or indirectly, from immovable property situated in Kazakhstan; and

where shares derive the greater part of their value from certain offshore rights and/or movable property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in Kazakhstan.

This is the 65th agreement Cyprus has signed on the avoidance of double taxation. Growing Cyprus’ network of double taxation conventions is of high economic and political importance and aims to further strengthen Cyprus as an international business centre.

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SOS Substance on Substance: Episode three
Tue, 30 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-three/
http://www.harneys.com/insights/sos-substance-on-substance-episode-three/
In the third instalment of Harneys’ SOS Series, Phil Graham and Josh Mangeot examine the implications of the first reading of the BOSS (Amendment) No 2 Act, 2019 in the House of Assembly, which is the enabling legislation for bringing into force the International Tax Authority (ITA)'s economic substance Code in the BVI. It is expected that the second and third reading will take place in the House as soon as possible, and will come into law shortly thereafter.

Phil and Josh discuss the process involved in the Code being finalised in the BVI; and what steps entities should be taking right now – particularly if they may be in breach of the Economic Substance (Companies and Limited Partnerships) Act, 2018, given that the first compliance period has now started.

Click below to listen.

Key takeaways:

The first compliance period has commenced for all BVI registered companies and limited partnerships with legal personality.

Such entities are now in their first “financial period” for compliance purposes and need to classify their activities (and to consider their tax status, if they carry on any “relevant activity”) and take steps to ensure that they are compliant as soon as possible, if they have not done so already.

Nil returns” will be required for all BVI entities.

The ITA is expected to provide further clarification around what “evidence” will be accepted where an entity wishes to claim it is “non resident” for tax purposes.

Stay tuned for more Substance on Substance.

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SOS Substance on Substance: Episode two
Tue, 23 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/sos-substance-on-substance-episode-two/
http://www.harneys.com/insights/sos-substance-on-substance-episode-two/
The SOS series was launched to provide our audience with the latest news on developments in the Economic Substance space, cutting through the confusion to deliver expert guidance from our Economic Substance Analysis team.

Episode 2

In the second episode, Phil Graham and Josh Mangeot discuss the key aspects of an industry update provided by BVI Finance on 12 July 2019. The update clarified that the commencement dates for entities’ first “financial period” remain unchanged and discussed the BVI International Tax Authority (ITA)’s stated approach to the use of its investigation powers as they relate to BVI entities, registered agents and other corporate service providers.

Click below to listen.

Key takeaways:

The first compliance “financial period” has commenced for all BVI companies and limited partnerships with legal personality as set out in section 4(1) of the Economic Substance (Companies and Limited Partnerships) Act, 2018 – in particular, the 30 June 2019 commencement date for entities formed or registered before 2019 remains unaffected

All BVI companies and relevant entities should have conducted an entity classification to determine whether they carry on any relevant activities and, if so, to determine their compliance and reporting obligations

The ITA has stated that the manner in which a legal entity determines its classification should be formalised in such detail so as to allow the ITA to make a determination of compliance or non-compliance and, as part of its investigation and enforcement powers, it will be expected that registered agents will retain the relevant details and documentation to ensure the timely provision of that information

This episode was recorded on 19 July 2019.

Harneys’ online classification solution is available to all BVI companies and limited partnerships to assist with this exercise at a fixed price point – for more information, please visit:www.economicsubstance.vg

There is nothing more satisfying than project success for an impact investment in a frontier or emerging market. However, the tragic conundrum that exists is that whilst these are the markets that most require international investment, they also present the most risk for any sensibly minded investor. The investment paradigm is all about risk and reward. And frontier and emerging markets routinely display the full spectrum of risk.

Investors are required to evaluate the risks and returns related to a project before committing to invest. The risk profile of investments commonly includes political, geographic, currency, infrastructure, institutional, legislative, corporate and court risk. Risks that are important to consider, but are often not immediately apparent, include legislative, corporate and court. Legislative risk refers to a jurisdiction’s laws; some jurisdictions have less modern and investment friendly laws that are obstructive to the ease of doing business. Corporate risk relates to the nature and type of corporate entities and their ability to be aligned with the corporate governance and control expectations of investors. Court risk covers the ability to resolve disputes efficiently and fairly through access to reputable courts with a deep bench and strong precedent.

Innovators are often entrepreneurs and to achieve success, like any start-up, they need to attract investment funding, usually from multinational investors. Choosing the appropriate capital raising vehicle and legal framework to attract and protect the investment can be difficult. Most multinational investors will look to be treated equally, and prefer the transaction documents being governed by common law opposed to civil code law and have access to reputable courts with that deep bench and strong precedent.

Fortunately, it does not take a rocket scientist to identify how a jurisdiction that offers modern corporate laws, efficient and effective court relief and investor neutrality can add value through a corporate structure for frontier and emerging market projects reliant on multinational inbound investment.

The BVI is a jurisdiction that offers such corporate solutions. While this does not reduce all the risks faced by investors, such structures can and do mitigate legislative, corporate, transactional and court risk – this is known as theBVI Corporate Advantage.

Kingo Energy and Hybrico have each attained project success and changed the lives of people in rural communities previously deprived of energy owing to their inaccessibility to traditional grid connectivity. Kingo and Hybrico are energy pioneers in that they have harnessed technology solutions to overcome challenges that traditional methodologies could not solve in the energy space. Kingo provides off-grid villages with decentralized solar energy services, while Hybrico powers cellular towers in rural areas with green and hybrid energy. When solar power is blended with mobile technology and internet network access it is life altering.

The International Finance Corporation in 2012 found that every year worldwide, poor households spend US$37 billion on kerosene for lighting, biomass for cooking, and other unsustainable and unhealthy fuels. Hundreds of millions of people have no access to grid electricity and consequently are exposed to health risks from fuel-based energy sources.

Employing theBVI Corporate Advantage,Kingo and Hybrico chose to use a BVI company as their capital raising vehicle and BVI law to govern the transaction documents. However, they could have equally used New York law or English law as the flexibility of BVI law would have accommodated this. BVI corporate law enabled the constitutive documents of the BVI company to be shaped and designed to satisfy the corporate governance and control requirements of the investors thereby helping to protect their investment and promote project success.

In these cases, due to the zero-tax applicable to the BVI company, each investor also attained investor neutrality in that there were no pros and cons for the investors that would otherwise exist in relation to double tax treaty forum shopping. To clarify, a BVI company is tax neutral and simply a corporate conduit – the cable connecting the solar panel to the battery. The investment flows through the BVI company from the multinational investors directly into the operating company in the frontier market. The operating company is a local company and subject to tax in that frontier jurisdiction. When returns are paid to investors on their investment, they again flow through the BVI company back to the investors who are accountable for applicable taxation on those returns in their own jurisdictions. Subjecting the BVI company to a BVI tax would simply reduce the funds available for investment and/or the return on investment for the investors by adding a layer of unnecessary and irrelevant tax. Both projects are fully transparent and aligned with the Environmental, Social, and Governance (ESG) objectives required of development finance institutional investors.

TheBVI Corporate Advantageis helping to overcome those challenges by ensuring that impact investment transactions are maximised for those vitally needed projects in emerging and frontier markets.

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Provision of virtual asset services now formally subject to Cayman’s AML regime
Tue, 16 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/provision-of-virtual-asset-services-now-formally-subject-to-cayman-s-aml-regime/
http://www.harneys.com/insights/provision-of-virtual-asset-services-now-formally-subject-to-cayman-s-aml-regime/
Under recent changes to the Cayman Islands Proceeds of Crime Law, the provision of virtual asset services is now formally recognised as “relevant financial business”. Any entity that carries out relevant financial business must ensure that it complies with the Proceeds of Crime Law and the Anti-Money Laundering (AML) Regulations.

This means that all virtual asset service providers must fully comply with Cayman’s AML rules, including implementation of comprehensive AML policies and procedures, training of employees and appointment of AML compliance and reporting officers.

What are virtual assets and virtual asset service providers?

The definition of virtual assets is intentionally broad and taken from the Financial Action Task Force (FATF) guidance on virtual assets and virtual asset service providers which can be found here. Virtual asset service providers include exchanges or, possibly more accurately, market places that enable virtual assets and fiat currencies to be exchanged with one another and therefore include crypto/crypto exchanges. They also include any business that provides the services of transferring virtual assets or safekeeping and/or administration of virtual assets or the instruments enabling control over virtual assets such as crypto custodians.

What is the impact on virtual asset exchanges?

All Cayman-based virtual asset exchanges, to the extent that they haven’t already done so, are now explicitly required to comply with Cayman’s AML rules.

We have been advising clients that have been looking to form crypto exchanges or market places for some time that they should conduct their businesses in compliance with Cayman’s AML regime and as a result this new requirement will likely not present additional regulatory burden to those businesses. However, for those that have simply chosen to avoid any form of oversight on the basis that they weren’t conducting a fiat/crypto business, this may well be terminal.

What is the impact on virtual asset service providers generally?

In our experience, the activities of most Cayman virtual asset service providers, whom we have advised, already fall under the definition of relevant financial business as they are providing value transfer services and accordingly they should be conducting their business in compliance with Cayman’s AML rules. For those that are not doing so, this recent amendment ensures that compliance is now mandatory for the entire industry.

This change demonstrates the Cayman Islands Government’s commitment to having an AML regime that continuously seeks to ensure effective supervision of the ever changing financial services industry in the Cayman Islands and adheres to global standards recommended by the FATF.

Harneys’ Regulatory team is well versed in all aspects of Cayman’s AML requirements, so please contact your usual Harneys contact if you would like advice on compliance with the AML regime in Cayman. If you have any other questions, visit harneys.com/Cayman.

Timing update and classification requirements

The first compliance “financial period” has commenced for all BVI registered companies and limited partnerships with legal personality.

On Friday 12 July, BVI Finance reminded the industry that the commencement of the first financial period remains as set out in Section 4 of the Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act). For legal entities registered or formed before 1 January 2019, the first financial period commenced on 30 June 2019 by default. All legal entities should therefore ensure they have determined their classification under the Act if they have not done so already (and monitor their position going forward).

The BVI International Tax Authority (ITA) has indicated that it will expect to see robust evidence of the basis for such classification. Specifically, the manner in which a legal entity determines its classification should be formalised in such detail so as to allow the ITA to make a determination pursuant to Section 10(1) of the Act and it will be expected that BVI registered agents will retain the relevant details and documentation to ensure that the provision of information pursuant to Section 11(1) of the Act is in a timely manner to meet the requirements of Section 11(2) of the Act and avoid the sanctions set out in Section 11(3) of the Act.

Harneys’ online classification solution is available to all BVI companies and limited partnerships to assist with this exercise at a fixed price point – for more information, please visit: www.economicsubstance.vg

Stay tuned for more Substance on Substance.

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CySEC deadline for statistical information fast approaching
Mon, 15 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/cysec-deadline-for-statistical-information-fast-approaching/
http://www.harneys.com/insights/cysec-deadline-for-statistical-information-fast-approaching/
On 28 June 2019, the Cyprus Securities and Exchange Commission (CySEC) issued a circular advising Cypriot investment firms (CIFs) that a new version of the form used to collect statistical information on an annual basis, form RBSF-CIF Version 2 (the Form), has been issued.

CySEC will use the information for the purposes of conducting statistical analysis, risk management and other purposes. All CIFs that were authorised by 31 December 2018, including those who have not made use of their authorisation, must complete and submit the form to CySEC electronically via CySEC’s Transaction Reporting System (TRS) by 18 July 2019.

If you have any questions, please contact Aki Corsoni-Husain, Marina Stavrou or your usual Harneys contact.

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CSSF online assessment concerning PRIIPs: 31 October deadline
Tue, 09 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/cssf-online-assessment-concerning-priips-31-october-deadline/
http://www.harneys.com/insights/cssf-online-assessment-concerning-priips-31-october-deadline/
On 1 July 2019, the Commission de Surveillance du Secteur Financier (CSSF) issued a press release concerning the packaged retail and insurance-based investment products (PRIIPs). The regulator requires all SIFs, Part II UCIs and SICARs to complete an online assessment available on the eDesk portal as specified in Circular 19/721 (Dematerialisation of requests to the CSSF).

As securities or partnership interests issued by Luxembourg regulated investment funds are likely to qualify as PRIIPs, the regulator would like to obtain an overview of the impact of the PRIIPs Regulation on Luxembourg-regulated investment funds. The Luxembourg regulator requires completion of the online assessment by 31 October 2019.

If you have any questions, please contact Vanessa Molloy or your usual Harneys contact.

All Luxembourg legal entities registered with the Luxembourg Trade and Companies Register, including common funds (FCPs) and Luxembourg branches of foreign companies are required to provide up to date information on their beneficial owners. While listed companies are also covered, they will only be required to provide information regarding the stock exchange on which they are listed.

The RBE law entered into force on 1 March 2019 with a six month transitional period provided to the entities concerned to comply with the requirements of the RBE Law.

The registration of the beneficial owners must be carried out online through the RBE portal with all current beneficial owners to be registered by 31 August 2019 in order to avoid criminal fines resulting from a breach of the RBE Law and to benefit from a free-of-charge filing.

For more information on the Luxembourg register of beneficial owners read Harneys' guide here.

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Luxembourg register of beneficial owners
Mon, 08 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/luxembourg-register-of-beneficial-owners/
http://www.harneys.com/insights/luxembourg-register-of-beneficial-owners/
The Luxembourg Law of 13 January 2019 (RBE Law) providing for the setting-up of a register of beneficial owners of Luxembourg legal entities (Registre des bénéficiaires effectifs or RBE) was published in the Luxembourg official gazette on 15 January 2019.

The RBE Law transposed into Luxembourg law article 30 of Directive (EU) 2015/849 (known as the 4th AML Directive) as amended by Directive (EU) 2018/843 (known as the 5th AML Directive) on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing.

The RBE Law entered into force on 1 March 2019 with a six month transitional period provided to the entities concerned so as to require them to comply with the requirements of the RBE Law by 1 September 2019.

The register

The RBE is a central register containing information on the beneficial owners of Luxembourg legal entities and is managed by the Luxembourg Trade and Companies Registry as a separate register.

Entities concerned

All entities registered with the Luxembourg Trade and Companies Register are subject to the RBE Law. This includes listed entities (but see further on this below), investment funds (including common funds (FCPs)) and Luxembourg branches of foreign companies.

Beneficial owner

The definition of “beneficial owner” in the RBE Law is the one included in the law of 12 November 2004 on the fight against money laundering and terrorist financing as in force (the AML Law).

Under the AML Law, a beneficial owner is any natural person who ultimately owns or controls the entity and/or the natural person on whose behalf a transaction or activity is being conducted.

In relation to corporate entities, a beneficial owner is a natural person who ultimately holds or controls an entity by virtue of owning directly or indirectly a sufficient percentage of the shares, voting rights or capital in the entity, including by means of bearer shareholdings or control by other means but excluding where held through certain listed entities. A percentage of over 25 per cent is considered to be sufficient.

If, after having exhausted all possible means and provided there are no grounds for suspicion, no beneficial owner of a corporate entity can be identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), then any natural person who holds the position of senior managing official (dirigeant principal) of the entity will be treated as the beneficial owner.

Where a controlling interest is held through fiduciary arrangements and trusts, the settlor, the fiduciary agent or trustee, the protector (if any), the beneficiaries or, if beneficiaries have not been designated, the category of natural persons in whose main interest the legal arrangement or legal entity is set up or operates, and any other person exercising effective control over the fiduciary arrangement or the trust by means of direct or indirect ownership or by any other means, should be considered as being beneficial owner(s).

Regarding foundations, any natural person who holds functions equivalent or similar to those regarding fiduciary arrangements and trusts should be considered as being beneficial owner(s).

Obligations of the entities concerned

An entity within the scope of the RBE Law (but excluding certain listed entities) is required to:

obtain and hold adequate, accurate and up-to-date information on its beneficial owners and to continue to do so for a period of five years after its winding-up, such information being:

personal details of the beneficial owner including the name, nationality, place and date of birth, country of residence, private or professional address, identification number; and

the nature and extent of the beneficial interests;

upload electronically such information (and any subsequent modification) on to the RBE within one month from the date it learnt or should have learnt of the event giving rise to the requirement to submit the information; and

within three days of receiving a request, provide information on the beneficial owner(s) to national authorities and to self-regulated bodies and professionals subject to the AML Law such as lawyers, notaries, financial sector professionals, within the framework of their customer due diligence obligations.

Listed entities, provided their securities are admitted to trading on a regulated market in Luxembourg or in the European Economic Area or in a third country imposing transparency obligations recognised as equivalent, are required only to file the name of the regulated market on which their securities are admitted to trading.

Access to the information

The information contained in the RBE (excluding the beneficial owner’s address and identification number) will be accessible to everyone though the online portal. The search may be carried out either by reference to the entity’s name or its RBE registration number.

The following process is available for restricting access to the information:

The entity concerned or a beneficial owner may file an application to the RBE requesting that access to its information be restricted on the basis that access to the information reported would expose the beneficial owner to a risk of fraud, kidnapping, blackmail, violence or intimidation, or where the beneficial owner is a minor or otherwise suffering from an incapacity.

As from the moment of such application and until 15 days after the decision on the application is published, the manager of the RBE is required to restrict access to the information.

Where the application is accepted, the restriction on access to the information will apply for a maximum period of three years. An application for renewal of the restriction may be made.

Where the application is rejected, an appeal may be filed within 15 days and the manager of the RBE is required to continue to restrict access to the information until a final decision is made.

While access to the information is restricted, only national authorities, credit and financial institutions, bailiffs and notaries acting in their capacity as public officers have access the information of the RBE.

Decisions of the manager of the RBE may be challenged in court by any interested party within 15 days from the time of publication of the decision.

Sanctions

Financial penalties of between €1,250 and €1,250,000 can be imposed on entities which do not register the information on the RBE within the required timeframes, knowingly provide incorrect or partial information or information which has not been updated or fail to obtain and keep the information at their registered office.

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Cayman Islands: Update to Reportable Jurisdictions list announced
Thu, 04 Jul 2019 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-update-to-reportable-jurisdictions-list-announced/
http://www.harneys.com/insights/cayman-islands-update-to-reportable-jurisdictions-list-announced/
The Cayman Tax Information Authority (TIA) issued an advisory confirming an update to the Reportable Jurisdictions list, dated 17 May 2019 and gazetted on 14 June 2019, which can be found here. This list, which contains two new Reportable Jurisdictions, applies to filings made for the calendar year 2018. We strongly recommend that clients review this list to ensure that all reportable accounts have been identified and filed accordingly.

There were no changes to the notification and/or reporting deadlines.

Key dates

30 April 2019: FATCA and CRS notification deadline for all new Reporting FIs – now passed

Please contact Hazel O'Brien or your usual Harneys contact if you would like advice on any aspect of the AEOI regime in Cayman and how to comply with it or if you have any other questions or visit harneys.com/Cayman.

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Transformation of the way in which investment managers and advisors are regulated in the Cayman Islands
Mon, 24 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/transformation-of-the-way-in-which-investment-managers-and-advisors-are-regulated-in-the-cayman-islands/
http://www.harneys.com/insights/transformation-of-the-way-in-which-investment-managers-and-advisors-are-regulated-in-the-cayman-islands/
On 19 June 2019 the Cayman Islands Government brought into force its anticipated changes to the Securities Investment Business Law (SIBL).

The changes affect Cayman Islands investment managers and advisors registered as excluded persons under SIBL in the following ways:

New AML/CFT filings by 15 August 2019: all existing excluded persons must complete 2 detailed anti-money laundering and countering financing of terrorism (AML/CFT) reporting forms and file them (via their registered office provider in the Cayman Islands) on the Cayman Islands Monetary Authority’s (CIMA) online REEFS system by 15 August 2019.

New registered person regime: replacing the excluded person regime with a new regulated category of registered person.

Re-registration by 15 January 2020: existing excluded persons must re-register as a registered person by 15 January 2020 if they wish to continue carrying on securities investment business.

Minimum of two individual directors or one corporate director: each registered person structured as a company must have at least two individuals as directors or one corporate director and there are equivalent requirements for registered persons that are not companies.

Fit and Proper Tests: an applicant for registration must satisfy CIMA that the applicant’s shareholders, directors and senior officers are fit and proper persons.

Implementing economic substance in the Cayman Islands: Cayman Islands investment managers and advisors carrying on fund management business will likely be required to implement economic substance in the Cayman Islands upon re-registration.

All excluded persons must take action as a result of these recent changes as further outlined in this alert.

1. AML/CFT filings required by all excluded persons by 15 August 2019

What AML/CFT information has to be provided by excluded persons by 15 August 2019?

Excluded persons must provide detailed information to CIMA about:

its organisational structure, its principal place of business and whether it has any presence in the Cayman Islands;

client composition, location and level of sophistication of its clients;

the distribution channels that it utilises;

products and services that it offers and jurisdictions where they are offered;

its AML/CFT program including details about its corporate governance, policies and procedures, risk assessment process and audits;

its AML/CFT training, controls, record keeping, ongoing monitoring, transaction monitoring, staffing, use of eligible introducers and sanctions screening methods; and

AML officers and directors and any related politically exposed persons.

How is the AML/CFT information filed?

The detailed information must be submitted by us by uploading an AML/CFT risk control form and an AML inherent risk form, received from you, on CIMA’s online regulatory filing portal “REEFS” by 15 August 2019.

We will be contacting all those excluded persons for which we provide registered office services in relation to the completion of these forms. CIMA has published guidance notes on how to complete the forms, which are available on its website.

What are the consequences of not making the filing by the deadline?

An excluded person that does not make the AML/CFT filings by 15 August 2019 will not be able to re-register with CIMA under the new regime, until it has made these AML/CFT filings.

The excluded person may also be de-registered if it fails to make the filing by the deadline.

I am an excluded person, what are the next steps I need to take?

An excluded person should now review the forms and start to compile the information required. As access to the REEFS system is only available to Cayman Islands law firms and registered office providers excluded persons need to compile the information required and then provide it to us to complete the filings by the deadline.

Harneys’ Compliance Consultancy team

Harneys’ Fiduciary has a dedicated compliance consultancy team that can assist with AML/CFT audits and risk assessments. If you would like help meeting SIBL excluded persons regulatory requirements please contact us through harneysfiduciary.com.

2. New registered person regime

Who has to re-register as a registered person?

Any entity that is currently registered with CIMA as an excluded person must re-register with CIMA by 15 January 2020.

What are the requirements for re-registration?

Re-registration is subject to the excluded person applicant being in good standing with CIMA and being controlled by shareholders, directors and senior officers who are deemed by CIMA to be fit and proper persons.

The applicant must also have in place at least the minimum directorship requirements and the AML/CFT reporting forms must have been filed, as noted above.

Under this new regime CIMA will assess each application on its merits.

What are the minimum director requirements?

A registered person that is structured as a company must have a minimum of two individual persons as directors, or one corporate director. The directors must be in good standing and must be registered or licensed under the Directors Registration and Licensing Law.

This alert focuses on those registered persons that are structured as companies. Equivalent provisions apply for vehicles that are not companies and your usual Harneys contact is able to advise you of those provisions.

How do I re-register my excluded person as a registered person?

Re-registration will be made by way of submission of a form on REEFS, which is expected to be available shortly.

As noted above, access to the REEFS system is only available to Cayman Islands law firms and registered office providers, so excluded persons will need to liaise with us to compile and file your application to re-register.

Does CIMA have the power to reject my application for re-registration?

Yes, CIMA has discretion to approve or deny an application for registration as a registered person, unlike the prior registration process that existed for excluded persons.

What happens if I do not make the necessary application by the deadline?

Any excluded person that has not re-registered with CIMA by the deadline of 15 January 2020 may be de-registered.

What are the ongoing requirements as a registered person?

Under the new registered person regime further ongoing compliance obligations apply to registered persons and CIMA has a number of supervisory and enforcement powers over registered persons. There are significant penalties for failure to comply with any direction from CIMA.

As an excluded person, what do I do next?

An excluded person should review the SIBL re-registration and ongoing requirements and its ability to meet them, including any possible economic substance requirements set out below. Once the re-registration forms are released the excluded person should then prepare to re-register by the deadline of 15 January 2020.

How does the economic substance legislation now apply to Cayman Island investment managers and advisors?

When a Cayman Islands investment manager or advisor re-registers with CIMA as a registered person under SIBL they may come within the scope of the Cayman Islands economic substance law if they are conducting ‘fund management business’. A registered person conducts fund management business if it has discretionary investment powers for an investment fund.

Any relevant entity that conducts fund management business is required to satisfy the economic substance test.

As an investment manager or advisor, what do I do next?

Investment managers and advisors should firstly consider whether they are a relevant entity and whether they are conducting fund management business for the purpose of the economic substance law.

Investment managers and advisors who are relevant entities conducting fund management business and who wish to continue their current business will therefore need to review their timing of re-registration and their ability to comply with the economic substance law as part of the re-registration process.

Please see our client guide to economic substance in the Cayman Islands which we recently published that sets out further details about the new economic substance regime. Your usual Harneys contact is able to advise you with respect to the Cayman Islands new economic substance requirements.

Why are these changes and filing requirements being introduced?

The changes to the SIBL regime and new filing requirements are part of a raft of new measures being introduced to enhance the Cayman Islands’ regulatory regime. The AML/CFT filings are specifically required by CIMA to enable CIMA to assess the AML/CFT risks associated with SIBL registrants’ current operations, in line with the Caribbean Financial Action Task Force standard.

The changes further demonstrate the Cayman Islands Government’s commitment to having a regulated securities investment and AML/CFT regime that continuously seeks to employ best practice and ensure effective supervision of the financial services industry in the Cayman Islands.

We recently issued a client alert regarding other changes to the supervisory powers that CIMA can exercise.

Harneys’ Investment Funds and Regulatory team

Harneys’ Investment Funds and Regulatory team is well versed in all aspects of the SIBL and AML requirements, so please contact your usual Harneys contact if you would like advice on compliance with the new SIBL and economic substance regimes in the Cayman Islands. If you have any other questions, visit www.harneys.com/Cayman.

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BVI FARS Portal online and updated FATCA and CRS reporting deadline and Reportable Jurisdiction list announced
Mon, 24 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/bvi-fars-portal-online-and-updated-fatca-and-crs-reporting-deadline-and-reportable-jurisdiction-list-announced/
http://www.harneys.com/insights/bvi-fars-portal-online-and-updated-fatca-and-crs-reporting-deadline-and-reportable-jurisdiction-list-announced/
The BVI ITA announced on 20 June 2019 that the FATCA and CRS reporting deadline for reporting Financial Institutions (FIs) has been extended to 31 July as a result of the technical issues with the portal.

FIs should file all returns (including those outstanding from years 2014 through 2017) as soon as practicable as access to FARS may be affected by increased activity closer to the filing deadline.

Notification deadlines are unchanged and have already passed (they were 1 April 2019 for US FATCA and 30 April 2019 for CRS); therefore any FI that has not completed its notification process should submit their notification immediately.

Updated Reportable Jurisdiction List

The ITA advisory also confirmed that an updated Reportable Jurisdiction List, dated 9 May 2019 is available on the BVI Government website8989. This list applies to filings made for the calendar year 2018. We strongly recommend that clients review this list to ensure that all reportable accounts have been identified and filed accordingly.

Key Dates

1 April 2019: FATCA notification deadline for all new Reporting FIs – now passed

30 April 2019: CRS Notification deadline for all new Reporting FIs – now passed

Please get in touch your usual Harneys contact if you would like advice on any aspect of the BVI AEOI regime.

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The liquidity conundrum
Thu, 20 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/the-liquidity-conundrum/
http://www.harneys.com/insights/the-liquidity-conundrum/In response to market pressures which range from quant and index funds to political and economic factors, in order to seek alpha and deliver returns to investors hedge fund managers are increasingly looking to less liquid strategies such as private credit, private equity and infrastructure.]]>
Enhanced AML supervisory powers given to CIMA under money laundering legislation
Tue, 18 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/enhanced-aml-supervisory-powers-given-to-cima-under-money-laundering-legislation/
http://www.harneys.com/insights/enhanced-aml-supervisory-powers-given-to-cima-under-money-laundering-legislation/
Under recent changes to the Cayman Islands Anti-Money Laundering Regulations (AMLRegulations), the powers of the Cayman Islands Monetary Authority (CIMA), as the supervisory authority for anti-money laundering in the Cayman Islands, have been enhanced to allow CIMA to obtain information in relation to any relevant financial business from a broader category of persons than was previously the case.

Additionally, CIMA, any competent authority or government body were given the statutory authority to share or provide information among themselves for the purpose of assessing money laundering or terrorist financing risks, or discharging any function under the Proceeds of Crime Law (the PCL).

Both of these changes demonstrate the Cayman Islands Government’s commitment to having an anti-money laundering regime that continuously seeks to employ best practice and ensure effective supervision of the financial services industry in the Cayman Islands.

How were CIMA’s powers enhanced?

CIMA now has the statutory power to request information from the person or entity carrying out relevant financial business, a person connected to the relevant financial business, or a person reasonably believed to have relevant information. CIMA has also been given the powers to compel any such person to answer its questions, provide documents, statements or any other information requested by it.

What if the person fails to comply with a demand notice?

A person who fails to comply with such a notice from CIMA is liable on summary conviction, to a fine of up to CI$500,000 (approximately US$610,000) or on conviction on indictment, to a fine and to imprisonment for two years.

When can CIMA, any competent authority or government body share information?

CIMA, any competent authority or government body can share or provide information of their own volition or upon request by another Cayman Islands supervisory authority, competent authority or government body.

The information must be shared or provided for the purpose of assessing money laundering or terrorist financing risks or discharging any function under the PCL.

Is there any obligation for CIMA to notify of the sharing of information?

There is no obligation under the AML Regulations for CIMA to notify the provider of information or the relevant financial business that it is sharing information.

Are there any restrictions with respect to shared information?

The recipient of any shared information must only use the information for the purpose for which it was shared, only retain it for as long as necessary, and cannot disclose the information for any other purpose other than that for which it was shared without the consent of the provider.

Harneys’ Regulatory team is well versed in all aspects of Cayman’s AML requirements, so please contact your usual Harneys contact if you would like advice on compliance with the AML regime in Cayman. If you have any other questions, visit harneys.com/Cayman.

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Adding an offshore vehicle to your fund structure
Thu, 13 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/adding-an-offshore-vehicle-to-your-fund-structure/
http://www.harneys.com/insights/adding-an-offshore-vehicle-to-your-fund-structure/
In this Article, originally published by HFM, our Co-Global Head of Investment Funds Phil Graham examines how US managers can bolster their offering by adding an offshore fund to their structure.]]>
Pre-marketing and reverse solicitation of hedge funds
Thu, 06 Jun 2019 00:00:00 +0100
http://www.harneys.com/insights/pre-marketing-and-reverse-solicitation-of-hedge-funds/
http://www.harneys.com/insights/pre-marketing-and-reverse-solicitation-of-hedge-funds/
In this article, first published by Hedge Fund Insight, Vanessa Molloy and Chiara Deceglie discuss pre-marketing and reverse solicitation of hedge funds.

Last month, the European Parliament adopted the final text of the Directive amending (amongst others) the Alternative Investment Fund Managers Directive (the Amending Directive). This European Union law applies to the financial regulation of hedge funds, private equity funds and other alternative investment funds in the EU.

The stated objective of the Amending Directive is to establish uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings in relation to their cross-border activities. The Amending Directive is required to be transposed into national law within two years of the entry into force of the Directive. Full implementation can therefore be expected to occur sometime in the summer of 2021.

Pre-marketing and reverse solicitation

Previously, fund promoters embarking on a marketing roadshow, armed with an outline of the features of a potential alternative investment fund (AIF), would test the interest of prospective investors for certain strategies before proceeding with the establishment of the AIF. However, the definition of pre-marketing and the conditions under which it is permitted vary considerably within the EU. In certain Member States there is no concept of pre-marketing at all.

In Luxembourg, (amongst other jurisdictions – notably the UK) the presentation of draft offering documents in relation to an EU AIF by an authorised EU AIFM to prospective EU Professional Investors does not currently constitute marketing, provided no binding subscription can be made.

Following a roadshow, if an authorised EU AIFM responds to unsolicited enquiries from potential EU Professional Investors and follows up with offering documents, subscription forms, etc. (so-called “reverse solicitation” or “passive marketing”), this usually does not trigger the marketing notification obligation under the AIFMD. This approach is common amongst smaller managers, building their assets under management and launching their first funds.

To address these divergences, the Amending Directive introduces a harmonised definition of “pre-marketing”:

“pre-marketing” means provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or with a registered office in the Union in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with [the AIFMD] in that Member State where the potential investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment.

Under this new definition, any subscription of shares or units in an EU AIF by EU Professional Investors within 18 months of the authorised EU AIFM commencing pre-marketing will be deemed to be “marketing” under the AIFMD and subject to the marketing notification obligations. If, further to pre-marketing, the subscription occurs after the 18-month period, then the marketing notification procedures under the AIFMD are not applicable.

Although the pre-marketing definition adopted is not as narrow as the original definition proposed by the European Commission, it still fails to acknowledge that in practice many AIFs are highly tailored and negotiated investment vehicles and that pre-marketing rules may not be necessary in some of these cases.

Seemingly, the amending directive does not remove reverse solicitation in its pure form – where a professional investor accesses an AIF purely at his own initiative provided the local rules permit it.

Pre-marketing notification requirements

The Amending Directive requires an authorised EU AIFM to send, within two weeks of commencing pre-marketing, an informal letter to its regulator setting out, (amongst other matters), the Member States in which it has engaged in pre-marketing, the periods during which it occurred or continues to occur and, if relevant, a list of the AIFs and compartments subject to pre-marketing.

What does this mean for promoters?

The Amending Directive will only affect a promoter that is an authorised EU AIFM with an EU AIF, pre-marketing to EU Professional Investors.

For a non-EU AIFM, with an EU or non-EU AIF, and for an authorised EU AIFM with a non-EU AIF, the Amending Directive:

will not affect the existing marketing position in respect of EU/EEA retail investors. The rules of the EU Member State where the investor is domiciled will prevail and apply to pre-marketing and reverse solicitation.

will not affect the existing marketing position in respect of EU/EEA Professional Investors, where the national private placement regime will continue to apply.

will seemingly not affect a promoter that is not an authorised EU AIFM that has not yet identified an authorised EU AIFM (to be used as a third-party management company solution) because only a third party engaged in pre-marketing on behalf of an authorised EU AIFM will be impacted.

If you have any questions, please contact Vanessa Molloy, Chiara Deceglie or your usual Harneys contact.

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Amendments to the Cayman Islands Trusts Law
Wed, 22 May 2019 00:00:00 +0100
http://www.harneys.com/insights/amendments-to-the-cayman-islands-trusts-law/
http://www.harneys.com/insights/amendments-to-the-cayman-islands-trusts-law/
Amendments to the Trusts Law (2018 Revision) (Trusts Law) affirm the reputation of the Cayman Islands as a leading trusts jurisdiction.

The stated object of the Trusts (Amendment) Law, 2019 (Amendment Law) is “to enhance the inherent jurisdiction of the Court in relation to the administration of trusts”.[1]The amendments to the Trusts Law achieve this object in a number of ways, as we explain further below.

Power to correct mistakes – application of the Rule in Hastings-Bass

In particular, the Amendment Law introduces a statutory power enabling the Grand Court of the Cayman Islands (Court) to set aside mistaken exercises of a fiduciary power[2](a power which is exercised for the benefit of someone other than the holder of the power). An application to correct a mistake may be made by:

the trustee or other person who holds the relevant power (power holder)

a person beneficially interested under the trust

in the case of a purpose trust, the enforcer

in the case of a charitable trust, the Attorney General

any other person, with leave of the Court

The Court may set aside the exercise of a power where:

the power holder has exercised the power on the basis of irrelevant considerations or without taking into account all relevant considerations; and

had the power holder taken into account all and only relevant considerations, they would not have exercised the power or would have done so on a different occasion or in a different manner.

It is not necessary for an applicant to show that the power holder acted in breach of trust or duty. As such, the Amendment Law confirms that an expansive Hastings-Bass[3] type application is permissible in the Cayman Islands. Such applications have previously been approved by the Court.

If the exercise of a power is set aside by the Court, it is treated as never having occurred.

Importantly, however, the Court cannot intervene where it would prejudice a bona fide purchaser for value of any trust property who did not have notice of the matters that would allow the Court to set aside the exercise of the power.

Power to approve a settlement and variations to a trust

The Amendment Law also enables the Court to approve the settlement of “trust litigation” on behalf of any beneficiary if the Court is satisfied that the settlement is not to the detriment of any such beneficiary, even where the Court cannot be satisfied that the settlement is for their benefit.[4] “Trust litigation” means litigation invoking the inherent jurisdiction of the Court in relation to the administration of trusts (including for example, a blessing application).

The Court’s power to approve a variation of a trust has been similarly amended, allowing the Court to approve a variation on behalf of a beneficiary where the Court is satisfied that the variation is not to the detriment of that beneficiary.[5]

In short, in relation to the Court’s power both to approve a settlement and a variation of a trust, the “benefit test” has been replaced with the “no detriment test”.

These amendments will make it easier to compromise trust litigation or to vary a trust where, for example, all adult beneficiaries agree that litigation should be compromised or the trust varied in a particular manner but the Court’s approval on behalf of, for example, minor or unborn beneficiaries is required. These amendments also mean that the costs of associated applications to the Court will be lower, for the benefit of all beneficiaries.

Firewall expansion

The Trusts Law already protects trusts and dispositions of property into trust from being challenged on the basis that the trust or disposition defeats an interest conferred by foreign law by reason of an individual’s personal relationship to a settlor.[6] For example, an heir of a settlor cannot challenge a disposition of property on the basis that they would have inherited the property under foreign forced heirship laws.

The Amendment Law expands the firewall to protect trusts from challenges mounted on the basis of a personal relationship to a beneficiary. As such, spouses of both settlors and beneficiaries, for example, are prevented from challenging a trust on the basis of a spousal right arising under foreign law.

Trust corporations

The Amendment Law introduces a single definition of “trust corporation”, so that it includes a registered controlled subsidiary of any licensed trustee company or a private trust company for all purposes under the Trusts Law.[7]

[3] In Re Hastings-Bass; Hastings-Bass v IRC [1975], the English Court of Appeal established the rule (explained subsequently in Sieff & Ors v Fox [2005] 1 WLR 3811) that the court has discretion to set aside an exercise of power if a trustee failed to take into account relevant considerations, or took into account irrelevant considerations when exercising the power. This rule has been subsequently developed, including in Pitt v Holt; Futter v Futter [2013] UKSC 26 where the Supreme Court confirmed that an exercise of a power is only voidable where it also amounts to a breach of fiduciary duty.

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How to manage the succession of a BVI Co
Tue, 21 May 2019 00:00:00 +0100
http://www.harneys.com/insights/how-to-manage-the-succession-of-a-bvi-co/
http://www.harneys.com/insights/how-to-manage-the-succession-of-a-bvi-co/
In this article, originally published by Private Banker International, Matthew Howson shows how advisors can manage the succession of a BVI Co.

The British Virgin Islands International Business Company (the BVI Co) is still the world’s favourite wealth management vehicle. There are around 600,000 BVI Cos in existence, and although it is no longer quite the case that every Hong Kong 18-year old receives a briefcase and “a BVI”, in many parts of the world they remain ubiquitous.

Although many of them are tied up in trusts or corporate structures, many others are held by individuals in their own names or under a nomineeship.

As mortality catches up with even UHNWs, what should you be aware of when your client passes away?

In our experience, most banks know that a Grant must be obtained before the deceased’s shares of the company – and hence their voting rights – can be passed down to their beneficiaries. A Grant is essentially a Court document, authorising banks, company agents, etc, to accept the transfer instructions of the deceased’s personal representative.

There is a widespread misconception however, that a Grant obtained in the deceased’s home jurisdiction is sufficient to pass title to their worldwide assets. In fact, like most countries, the BVI retains jurisdiction over assets based in that jurisdiction. Shares in BVI Cos are deemed situated in BVI for title purposes, regardless of the location of the shareholders. A Grant from Hong Kong or New York is as ineffective to transfer them as a BVI Grant would be to transfer an apartment in Manhattan.

A BVI Grant is needed even where the shares are held through a nomineeship, and on the death of a survivor of a joint tenancy. It is even needed when the client is from the BVI’s parent country, the UK, although Grants from the UK and other Commonwealth monarchies can be “resealed” or confirmed in the BVI, an easier process than a full application.

So, how to obtain a BVI Grant? After 70 years of jurisdictional independence, the process is a very different beast to the UK equivalent. It essentially involves a bundle of around 10 affidavits and documents submitted to the BVI Probate Registry. Although no inheritance tax is payable, searches must be made, and adverts placed in local newspapers.

Much of BVI probate practice is unwritten and based on an informal agreement with the registrars, so it pays to instruct an experienced firm based in the BVI itself. It tends to take a few months to prepare the application documents, depending on the speed of the client to sign them. Once the application is submitted, the Registry takes on average three to five months to make a Grant, depending on the complexity of the case and in particular whether there is a BVI Will.

Until the process is complete:

the shares cannot be transferred to the beneficiaries; and

the executor cannot exercise the voting rights attached to the holding, potentially causing quorum and majority deadlock in regard to major corporate issues.

These points can cause major headaches to families involved in restructuring or in need of funds.

How to mitigate or even avoid this process? There are a variety of techniques.

To mitigate:

BVI Will:Although a BVI Grant can be obtained with a foreign Will or no Will at all, a BVI Will speeds the Probate process substantially because the BVI Probate Registry is comfortable with BVI Wills and so will rubberstamp them with fewer questions. Note that this does not allow a client to avoid laws such as forced heirship, since a BVI Will must comply with the succession laws of the client’s domicile. Note also that a BVI Will has different requirements than Wills from the UK or other jurisdictions so it is not always possible to “rebrand” an English Will.

Expedited probate process:a formal process was brought in in 2017. Although the only post-death solution available, it involves a Court hearing and so is concurrently expensive.

To avoid:

Joint tenancies: the assets will be transmitted by operation of law on the death of the first to die, though does not resolve the issue of the survivor’s death.

Trusts: although bare trusts do not avoid probate, more substantive trusts do. Trusts are increasingly recognised worldwide, and although some are complex and expensive, others are simple and simply allow for succession to specified individuals on the settlor’s death. Trusts do not have to be BVI-governed to avoid BVI probate. However, they must have at least two trustees if they are individuals, since the death of a sole trustee will trigger the need for a Grant even if a successor is specified in the deed. This can often trip up US trusts with a single individual trustee.

Corporate solutions: various types of bespoke Memorandums & Articles offer share class and other probate avoidance solutions. These are yet to be tested in the courts.

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BVI FSC signs memorandum of understanding with UK FCA
Mon, 20 May 2019 00:00:00 +0100
http://www.harneys.com/insights/bvi-fsc-signs-memorandum-of-understanding-with-uk-fca/
http://www.harneys.com/insights/bvi-fsc-signs-memorandum-of-understanding-with-uk-fca/
Given the global harmonisation of the various financial markets and the increase in cross-border operations and activities of managers of alternative investment funds (AIFs), the BVI’s Financial Services Commission (the FSC) and the UK’s Financial Conduct Authority (the FCA) have signed a memorandum of understanding (MoU) relating to mutual legal assistance in the supervision of managers of AIFs, their delegates and depositaries that operate on a cross-border basis in the BVI and the UK. The MoU is generally structured similarly to an information exchange agreement. The MoU comes into force on the date the European Union legislation cease to have direct effect in the UK.

What is the MoU designed to achieve?

The FSC and the FCA have, under the MoU, agreed to:

express their willingness to cooperate with each other in the interest of fulfilling their respective regulatory mandates;

confer upon any person the right or ability directly or indirectly to obtain, suppress or exclude any information or to challenge the execution of a request for assistance under the MoU;

intend to limit the FSC or the FCA to take solely those measures described in the MoU in fulfilment of their supervisory or oversight functions; and

affect any right of the FSC or the FCA to communicate with, or obtain information or documents from, any person or Covered Entity (an AIFM or AIF (as defined in the MoU)) subject to its jurisdiction that is established in the territory of the other.

The FSC and the FCA will provide one another with the fullest cooperation permissible under the law in relation to the supervision and oversight of the Covered Entities. However, following consultation cooperation may be denied:

where the cooperation would require an authority to act in a manner that would violate domestic law;

where a request for information is not made in accordance with the terms of the MoU; or

on the grounds of the national public interest.

No domestic banking secrecy, blocking laws or regulations will prevent the FSC and the FCA from providing assistance to each other. The FSC and the FCA will periodically review the functioning and effectiveness of the cooperation arrangements with a view to expanding or altering the scope or operation of the MoU should that be necessary.

Cooperation under the MoU will be useful in relation to:

the initial application of a Covered Entity for authorisation, registration or exemption from registration in another jurisdiction;

the ongoing oversight of a Covered Entity;

regulatory approvals or supervisory action taken in relation to a Covered Entity by the FSC or the FCA that may impact the operations of the entity in the other jurisdiction; and

enforcement action taken.

Notification and exchange of information

The MoU contains specific rules relating to notification and exchange of information. Provisions for cross-border on-site visits may also take place under the MoU.

Execution of requests for assistance

These will need to be made in writing and addressed to the relevant contact persons set out in Annex A of the MoU. The request should specify:

the information sought by the requesting authority, including specific questions to be asked and an indication of any sensitivity about the request;

a concise description of the facts underlying the request and the supervisory purpose for which the information is sought, including the applicable regulations and relevant provisions behind the supervisory activity; and

the desired timeframe for reply and where appropriate the urgency.

There is a procedure laid out in the MoU for how emergency situations are to be treated.

Use of information

Non-public information obtained may be used under the MoU solely for the purpose of supervising Covered Entities and seeking to ensure compliance with the laws and regulations of the requesting authority including assessing and identifying systemic risk in the financial markets or the risk of disorderly markets. The MoU contains provisions on confidentiality and onward sharing of information.

Termination

The MoU contains provisions relating to how it can be terminated.

If you have any questions, please contact Mirza Manraj or your usual Harneys contact.

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Cayman Court provides valuable guidance on dealing with frozen assets under Libyan sanctions
Fri, 17 May 2019 00:00:00 +0100
http://www.harneys.com/insights/cayman-court-provides-valuable-guidance-on-dealing-with-frozen-assets-under-libyan-sanctions/
http://www.harneys.com/insights/cayman-court-provides-valuable-guidance-on-dealing-with-frozen-assets-under-libyan-sanctions/
In Palladyne International Asset Management B.V. v Upper Brook (A) Ltd and Others[1], the Grand Court of the Cayman Islands issued important judicial guidance regarding the extent to which the dealing restriction under the Libyan sanctions regime was applicable in the Cayman Islands. In particular, the court was asked to examine the scope and meaning of the restriction on the ‘use’ of funds frozen under the Libya (Restrictive Measures) (Overseas Territories) Order 2011 (the Libya OT Order)[2].

The (defeated) argument

In short, Palladyne’s position was that the exercise of voting rights to remove and replace directors of three Cayman Islands funds (the Upper BrookFunds), whose assets were frozen under the Libya OT Order, would involve breaches of the dealing restriction in Article 10 of the Libya OT Order.

Under the Libya OT Order, relevantly:

Article 10(1) provides that without a licence from the competent authority, which in Cayman is the Minister of Finance, it is prohibited for a person to deal with funds or economic resources owned or controlled by a “designated person” or persons acting on their behalf; and

Article 10(4) specifies that “to deal with” in respect of funds will include “to use, move, allow access to or transfer”.

While the Upper Brook Funds where not themselves designated persons it was generally accepted that they had received investment from Libyan sovereign wealth funds, which were designated persons, and consequently the assets of the Upper Brooks Funds were subject to the restrictions in (1) and (2) above.

Palladyne’s argument was that Article 10(4) necessarily widened the ambit of the dealing restriction with respect to frozen assets by the word “use”. It followed that the mere exercise of voting rights by shareholders to change directors would necessarily cause a breach as this would constitute ‘using’ frozen assets (ie the shares in the Upper Brooke Funds).

It is clear that to make good their arguments, Palladyne took a more literal approach to interpreting the term “use” in the legislation.

The (successful) argument and the court’s view

The Upper Brook Funds countered by averring that Palladyne’s interpretation was contrary to the plain and ordinary meaning of the legislation and would be inconsistent with the object and purpose of the asset freeze. They argued that the prohibition on the dealing with funds, in context of shares, related to buying, selling, trading, or raising money by use of them as security, but should not extend to the exercise of voting rights attaching to them.

Plainly the Upper Brook Funds took a more purposive approach to interpreting the word “use” in the legislation.

Justice Segal, who heard the case, agreed with the Upper Brook Funds. According to the judge the term “use” should be construed having regard to the language used in Article 10(4) of the Libya OT Order as a whole, and the purpose of the UN’s sanctions regime which is to preserve the frozen assets, so that they can eventually be returned to the Libyan people. The asset freeze was designed to prevent any action being taken which would make the asset (ie the shares) less valuable.

The learned judge also referred to the definitions of “funds” and “to deal with” within the Libya OT Order. Taken together the Justice Segal makes it clear that the Libya OT Order is concerned with the “use” of funds (in this case shares) as a financial asset rather than with a view to the exercise of certain rights which are attached to such securities. Palladyne’s interpretation would therefore widen the scope of the dealing restriction impermissibly far.

Harneys’ reflections on the case

The ruling is significant not so much because it is the first of its kind in the Cayman Islands but rather because it provides helpful guidance from a court of law subject to UK sovereignty regarding the meaning of terminology common to almost all UK/EU-derived sanctions regimes – ie what does it mean to ‘use’ assets subject to the dealing restriction.

This judgment is consequently of direct relevance to other UK Overseas Territories, such as the British Virgin Islands, Anguilla and Bermuda – which also adopt the Libya OT Order as local law. Furthermore, it is also plainly relevant to the dealing restrictions beyond the Libya OT Order and those affecting, for example, regimes covering Russia/Ukraine, Iran, etc[3]. It could even be argued that it has a bearing upon the interpretation of the sanctions regimes in the UK and EU, on which the Libya OT Order is loosely based.

Further, the emphasis by the court on the character of funds as ‘financial assets’ is helpful as it clarifies that simple corporate governance measures taken in respect of frozen shares, such as changes to composition of the board, should not require prior approval of the relevant competent authority. The decision of the Justice Segal to favour the more purposive interpretation of the Upper Brook Funds rather than Palladyne’s more literal view is also, in our view, consistent with the more general body of law emerging in sanctions cases beyond the Cayman Islands.

[2] The Libya OT Order is an ‘Order in Council’ issued by the UK in respect of its Overseas Territories, including the Cayman Islands, as well as other jurisdictions we cover such as the British Virgin Islands, Bermuda and Anguilla. The Order implements, on behalf of the Overseas Territories, the UK’s obligation under the United Nations Security Council framework to impose sanctions on certain Libyan entities and individuals.

[3] A list of the various current sanctions regimes relevant to the UK Overseas Territories is found here.

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British Virgin Islands: No extension to FATCA and CRS reporting deadline for reporting Financial Institutions
Wed, 15 May 2019 00:00:00 +0100
http://www.harneys.com/insights/british-virgin-islands-no-extension-to-fatca-and-crs-reporting-deadline-for-reporting-financial-institutions/
http://www.harneys.com/insights/british-virgin-islands-no-extension-to-fatca-and-crs-reporting-deadline-for-reporting-financial-institutions/
The BVI ITA announced yesterday that the FATCA and CRS reporting deadline for all reporting Financial Institutions (FIs) other than Trustee Documented Trusts (TDT) remains 31 May 2019. TDTs with CRS reportable accounts have until 28 June 2019 to complete their CRS reporting for the 2018 calendar year.

Notification deadlines are unchanged and have already passed (they were 1 April 2019 for US FATCA and 30 April 2019 for CRS). This deadline applied to all new FIs that were formed since 2018.

The ITA advisory explained that the BVI Financial Account Reporting System (FARS) is still in the process of being updated and had provided guidance for CRS nil returns and the registration and reporting for TDTs.

CRS Nil Returns Mandatory

FIs with CRS reporting obligations are reminded that a nil return is mandatory where the FI does not maintain any CRS reportable accounts. FIs should follow the instructions as outlined in the FARS user guide on filing nil returns by XML schema. A copy of the FARS User Guide can be found on the BVI ITA website and the section relating to nil returns is on page 51 paragraph 3.4.

For FATCA reporting, although it is not mandatory, it is recommended as a practical measure that FIs file ‘nil returns’ in respect of their FATCA reporting if they have no US Reportable Accounts as positive proof of compliance with the FATCA regulations.

FIs should file all returns (including those outstanding from years 2014 through 2017) as soon as practicable as access to FARS may be affected by increased activity closer to the filing deadline.

TDT Filings

All FIs that qualify as TDTs under CRS are required to register on FARS. However, as a temporary measure pending the updates to FARS being released, trustees are advised that where they have not yet registered their TDT on FARS, they should submit the TDT CRS filings via the Trustee’s own FARS account, inserting the TDTs information in the Reporting FI section on the report. This provision for TDTs to report via the Trustees account is for the current reporting cycle and will be removed once FARS has been updated. Trustees who have already registered their TDT on FARS should submit CRS filings via the TDT account when FARS reopens.

Key dates

1 April 2019: FATCA notification deadline for all new Reporting FIs – now passed30 April 2019: CRS Notification deadline for all new Reporting FIs – now passed31 May 2019: 2018 FATCA and CRS reporting deadline including NIL reports for CRS28 June 2019: 2018 CRS reporting deadline for TDT

Please get in touch your usual Harneys contact if you would like advice on any aspect of the BVI AEOI regime and how to comply with it.

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Economic substance in the Cayman Islands
Tue, 14 May 2019 00:00:00 +0100
http://www.harneys.com/insights/economic-substance-in-the-cayman-islands/
http://www.harneys.com/insights/economic-substance-in-the-cayman-islands/
The International Tax Co-operation (Economic Substance) Law (the ES Law) was introduced in the Cayman Islands on 1 January 2019 in response to OECD’s Base Erosion and Profit Shifting framework and related EU initiatives in relation to what are known as ‘Geographically Mobile Activities’. Under the ES Law any relevant entity which carries on a relevant activity and receives relevant income in a financial period must satisfy the economic substance test in relation to that activity (ES Test) and make an annual filing with the TIA. Aside from the basic filing requirements, a relevant entity which does not carry on any relevant activity is not required to satisfy the ES Test. Harneys has issued a guide to assist directors and operators of Cayman Islands companies and limited liability partnerships. Download the pdf to read more.]]>
Are CLOs a good alternative investment for Asian Family Offices?
Wed, 08 May 2019 00:00:00 +0100
http://www.harneys.com/insights/are-clos-a-good-alternative-investment-for-asian-family-offices/
http://www.harneys.com/insights/are-clos-a-good-alternative-investment-for-asian-family-offices/
In recent years, we have seen an influx of Asian money into countries like Singapore and Hong Kong. According to the recent World’s Billionaire’s list published by Forbes, Asia is home to 719 billionaires, approximately 32.65% of the world’s billionaires. The ultra-rich are starting to take a more hands on approach in the investment of their wealth and Family Offices are on the rise. At the end of 2018, Asia has nearly 500 Family Offices in Asia and this number is set to rise in 2019. Family Offices not only provide investment strategies, they also assist with diversification of the family’s business portfolio, dispute resolution, and succession planning.

As Family Offices look to diversify their investments and increase yield, will investments in collateralised loan obligations (CLOs) serve as a good form of alternative investment for Asian Family Offices?

To answer that, we first have to understand what a CLO is. A CLO is a repackaged instrument consisting of a single security backed by a pool of non-investment grade debts. These debts are usually senior secured corporate loans to corporates with a lower credit rating or leveraged loans. With a CLO, the investor receives scheduled debt payments from the underlying loans and takes the risk of those borrowers defaulting on their loans. The upside for the investor is that it receives higher returns and has a more diversified portfolio and for the financial institution, these low-rated/leveraged loans are off its balance sheet.

There are two kinds of tranches in a CLO: the debt tranche and the equity tranche. Debt tranches have credit ratings and coupon payments. The debt tranches get repaid first but within the debt tranches, there are different pecking orders for repayments - those who get repaid first will take on less risk and those who get repaid last will take on the most risk as there could be very little/nothing left. Equity tranches do not have credit ratings and are paid out after all debt tranches have been paid if there is any excess cashflow and equity tranches do offer ownership in the CLO itself which means equity tranche holders will receive proceeds of any sale.

So how would a Family Office benefit from investing in CLOs?

1. Higher returnsIn an economy where the interest rates are rising, the prospects of investing in fixed income instruments like bonds become less attractive. CLOs can provide investors with a nice alternative as the underlying loans in a CLO are floating rate loans (ie such loans are priced at a spread to a benchmark rate like LIBOR or EURIBOR). As such, the higher the interest rates, the higher the returns for the investors of the CLO. For Family Offices, investments in CLOs, in particular equity tranches, has proven rewarding with yields as high as 20%.

2. DiversityCLOs can provide Family Offices with the diversity they need. Firstly, the loans are from corporates (usually 100-300 corporate loans) across different sectors in the economy (assuming one is not investing in a sector specific CLO). As such, even if one borrower defaults because of a downturn in a particular sector, it is not a total loss scenario for the investors as there will be other corporates who will not be affected by such a downturn. Secondly, Family Offices can invest in different tranches, including equity tranches, to cater for different risk appetites and investment objectives.

3. Ability to hold for longer termFamily Offices, unlike other public companies, funds and insurance companies, have the ability to commit their capital for a longer period of time and ride through volatility in prices, thereby getting higher returns on their investments. That being said, if the Family Office chooses to liquidate its investments in the short term, CLOs generally have a good trading liquidity in a healthy economy.

Notwithstanding the diversity and high yields, CLOs, being a complicated structured instrument, are not without risks. Below are some risks Family Offices should consider before investing in CLOs:

1. Covenant lite loans to low rated corporatesThe high demand for CLOs has led to loosening of borrowing conditions since banks are essentially transferring the risks of the low rated borrowers to the CLO investors - borrowers with weak credit ratings will still be able to borrow on the back of ‘covenant lite’ loan documentation ie there are now less protections in the loan documents which serve as early alarm bells for when a borrower may be in financial difficulties. By the time the borrower defaults on payment, there will be little protection left for the investors. According to the S&P Global Market Intelligence Leveraged Commentary & Data, in 2018, about 80% of all new leveraged loans are based off ‘covenant lite’ documents.

2. Illiquidity due to macroeconomic conditionsTrading liquidity is good to the extent that the economy is performing. To the extent that economies are facing a downturn or if there are any political uncertainties in the world from Brexit to the US-China trade war, this could impact on the liquidity of the CLOs. If a sizeable number of corporates in a CLO gets downgraded, this could lead to a frenzy to sell and prices to fall.

Despite the above concerns, we believe that, amongst others, the rise of Family Offices in Asia will continue to fuel the growth of the CLO markets in Asia. CLOs do offer good opportunities for Family Offices (whether they are new Asian Family Offices setting up and taking advantage of the tax and other incentives given by governments in countries like Singapore and Hong Kong or satellite offices of the US/Europe Family Offices wanting to gain access to Asian funds) notwithstanding the risks. The right investment strategy coupled with the patient capital that Family Offices can offer will allow Family Offices to withstand turbulence in the CLO markets and reap the benefits in the long term.

This article was originally published by Asian Banking and Finance.

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Cayman Islands Stock Exchange – The future for US CLO Listings
Thu, 02 May 2019 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-stock-exchange-the-future-for-us-clo-listings/
http://www.harneys.com/insights/cayman-islands-stock-exchange-the-future-for-us-clo-listings/
Partner Nicole Pineda and Senior Associate Thomas Gray discuss how the onerous regulatory burden placed on US CLO issuers and sponsors in the EU, both from an administrative and legal perspective, combined with the relative ease, efficiency and legal certainty of the Cayman Islands as a jurisdiction, has caused a significant increase in Cayman Islands Stock Exchange (CSX) CLO listings. Download the PDF to read more.]]>
The future of reverse solicitation in the EU in the context of the AIFMD
Mon, 29 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/the-future-of-reverse-solicitation-in-the-eu-in-the-context-of-the-aifmd/
http://www.harneys.com/insights/the-future-of-reverse-solicitation-in-the-eu-in-the-context-of-the-aifmd/
On 16 April 2019, the European Parliament adopted the final text of the Directive amending (amongst others) the AIFMD[1] (the Amending Directive).

The Amending Directive has the stated objective of establishing uniform rules on the publication of national provisions concerning marketing requirements for collective investment undertakings in relation to their cross-border activities.

Fund promoters heading out on their marketing roadshow, armed with an outline of the features of a potential alternative investment fund (AIF), would typically test with prospective investors the interest and appetite for certain strategies before proceeding with the establishment of the AIF. This flexibility allows promoters to avoid launching projects which would not find favour with investors with the consequent advantage of saving costs and time.

Pre-marketing and reverse solicitation

In Luxembourg, (amongst other jurisdictions - notably the UK) the presentation of draft offering documents in relation to an EU AIF by an authorised EU AIFM to prospective EU Professional Investors[2] does not currently constitute marketing, provided no binding subscription can be made.

Following a roadshow, if an authorised EU AIFM responds to unsolicited enquiries from potential EU Professional Investors and follows up with offering documents, subscription forms, etc. (so-called “reverse solicitation” or “passive marketing”), this usually does not trigger the marketing notification obligation under the AIFMD. This approach is common amongst smaller managers, building their assets under management and launching their first funds.

The definition of pre-marketing and the conditions under which it is permitted vary considerably within the EU, noting that in certain Member States there is no concept of pre-marketing at all. To address these divergences, the Amending Directive introduces a harmonised definition of “pre-marketing”:

“pre-marketing” means provision of information or communication, direct or indirect, on investment strategies or investment ideas by an EU AIFM or on its behalf, to potential professional investors domiciled or with a registered office in the Union in order to test their interest in an AIF or a compartment which is not yet established, or which is established, but not yet notified for marketing in accordance with [the AIFMD] in that Member State where the potential investors are domiciled or have their registered office, and which in each case does not amount to an offer or placement to the potential investor to invest in the units or shares of that AIF or compartment.

Any subscription of shares or units in an EU AIF by EU Professional Investors within 18 months of the authorised EU AIFM commencing pre-marketing will be deemed to be “marketing” under the AIFMD and subject to the marketing notification obligations. If, further to pre-marketing, the subscription occurs after the 18-month period, then the marketing notification procedures under the AIFMD are not applicable.

Pre-marketing notification requirements

The Amending Directive requires an authorised EU AIFM to send, within two weeks of commencing pre-marketing, an informal letter to its regulator setting out, (amongst other matters), the Member States in which it has engaged in pre-marketing, the periods during which it occurred or continues to occur and, if relevant, a list of the AIFs and compartments subject to pre-marketing.

What does this mean for promoters?

The Amending Directive will only affect a promoter that is an authorised EU AIFM with an EU AIF, pre-marketing to EU Professional Investors.

For a non-EU AIFM, with an EU or non-EU AIF, and for an authorised EU AIFM with a non-EU AIF, the Amending Directive:

will not affect the existing marketing position in respect of EU/EEA retail investors. The rules of the EU Member State where the investor is domiciled will prevail and apply to pre-marketing and reverse solicitation.

will not affect the existing marketing position in respect of EU/EEA Professional Investors, where the national private placement regime will continue to apply.

The Amending Directive will seemingly not affect a promoter that is not an authorised EU AIFM that has not yet identified an authorised EU AIFM (to be used as a third party management company solution) because only a third party engaged in pre-marketing on behalf of an authorised EU AIFM will be impacted.

Transposition into national law

The Amending Directive is required to be transposed into national law within two years of the entry into force of the Directive (being 20 days of its publication in the Official Journal of the EU). Full implementation can therefore be expected to occur sometime in the summer of 2021.

[1]Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers (AIFM).

[2]Investors, which are considered to be professional clients or which may, on request, be treated as professional clients within the meaning of Annex II of MiFID II.

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Sanctions screening guidance - Wolfsberg Group
Thu, 25 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/sanctions-screening-guidance-wolfsberg-group/
http://www.harneys.com/insights/sanctions-screening-guidance-wolfsberg-group/
The Wolfsberg Group is an industry association of 13 global banks which came together in October 2000 with the objective of developing financial service industry standards. In January 2019, the Wolfsberg Group issued guidance on sanctions screening (the Guidance) aiming to help Financial Institutions (FIs) understand and develop controls which would detect, prevent and in the event of breach, manage any apparent sanctions risk. The aim of the Guidance is not for all FIs to apply the elements outlined, rather, it seeks to demonstrate where sanctions screening can be an effective part of a wider sanctions compliance programme.

FIs act as the front line against financial crime and in addition to anti-money laundering and counter-terrorist financing controls, FIs should also be able to ensure that they are not doing business which is connected to individuals, entities or countries subject to sanctions. Hence, FIs should have policies and procedures in place in order to minimise the risk of committing a sanctions breach especially in an environment where regulators have an increased appetite to impose fines following inadequate internal sanction procedures and/or actual sanctions violations.

The Guidance encourages financial institutions to adopt a risk based approach (RBA) to sanctions screening and to consider all the aspects of the sanctions screening control framework which is consistent with both the Financial Action Task Force’s guidance on an RBA and with the 4th European Anti Money Laundering Directive.

FIs are encouraged to use screening tools to assist them in effectively managing their sanctions risk. Nevertheless, it is generally accepted that it is not possible for a sanctions programme to detect every possible sanctions risk due to the wide variety of variables and the quality of data available. Different FIs have a different approach to sanctions risk, this can be attributed to the fact that different FIs have a different risk appetite or offer products or services in jurisdictions which carry a different sanctions risk.

Actions FIs can undertake to minimise their risk of non-compliance:

undertake sanctions-based risk assessments to assess the likelihood of dealing with an individual or entity on a sanctions list;

ensure they have adequate policies and procedures in place approved by senior management;

appoint a responsible person with the appropriate skills and experience to deal with sanctions related issues;

use technology as a tool to identify financial crime risk through real-time and ongoing screening methods;

ensure they have proper internal escalation processes in the event there is an actual match;

conduct screening tests to assess the effectiveness of the systems;

ensure that all employees have been adequately trained in order to recognise any potential sanctions issue;

ensure that the appropriate supervision is in place in key client facing/ money transmitting departments;

ensure that senior management is committed to promoting sanctions compliance.

If you have any questions, or would like advice in relation to implementing a robust sanctions compliance policy, please contact Marina Stavrou, Andrea Moundi Savvides or your usual Harneys contact.

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Economic substance in the BVI: a guide for directors and operators of BVI companies and limited partnerships
Thu, 25 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/economic-substance-in-the-bvi-a-guide-for-directors-and-operators-of-bvi-companies-and-limited-partnerships/
http://www.harneys.com/insights/economic-substance-in-the-bvi-a-guide-for-directors-and-operators-of-bvi-companies-and-limited-partnerships/
The Economic Substance (Companies and Limited Partnerships) Act, 2018 was introduced in the BVI, effective 1 January 2019, to address the concerns of the EU Code of Conduct Group and the OECD Forum on Harmful Tax Practices regarding economic substance. Related amendments to the Beneficial Ownership Secure Search System Act, 2017 will implement an economic substance reporting regime. Harneys has issued this guide to assist directors and operators of BVI companies and limited partnerships. Download the pdf to read more.]]>
Economic substance – Draft BVI Code published
Tue, 23 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/economic-substance-draft-bvi-code-published/
http://www.harneys.com/insights/economic-substance-draft-bvi-code-published/
On 23 April 2019, the British Virgin Islands International Tax Authority (ITA) published a draft Economic Substance Code (the Code). The Code is supplementary to the Economic Substance (Companies and Limited Partnerships) Act, 2018 (ESA) and contains rules on how the economic substance requirements may be met and guidance on the interpretation of the legislation and the manner in which the ITA will carry out its obligations.

Key points to note from the draft Code include:

An entity will be treated as carrying on a relevant activity in the BVI during any financial period in which it receives income from that activity. (Rule 3)

Guidance on the meaning of “holding business” and “pure equity holding entity” will be of particular interest. Ownership by an entity of any investment other than equity participations will mean that it is not a pure equity holding entity. (Para 60)

A framework for the initial financial periods for both new entities (formed since 1 January 2019) and existing entities (formed prior to 1 January 2019) that outlines key requirements. The initial financial period for new entities is deemed to be 12 months from the date of formation. For existing entities, the initial financial period is deemed to be 12 months from 30 June 2019. (Rules 14 to 18)

The business of being an investment fund is not a relevant activity. An investment fund is outside of scope of the economic substance requirements, unless it carries on relevant activities besides being an investment fund. We await further technical guidance on funds from the EU’s Code of Conduct Group which is expected mid-2019. (Para 18)

An entity which provides credit as “an incidental part of a different sort of business” will not be treated as carrying on financing and leasing business (one of the relevant activities under the ESA). Only where the provision of credit can be seen to be a business activity in its own right will the entity be treated as conducting financing and leasing business. (Para 47)

Entities which hold debt or debt instruments for the purposes of investment will not be regarded as being in the business of providing credit facilities (and therefore outside of financing and leasing business). (Para 48)

The ITA has announced that the final Code will be issued in early May following a brief education campaign and will incorporate any amendments deemed necessary by the BVI Government. In our view, amendments made to the draft before final publication next month are likely to be minor.

A copy of the draft Code is available here. Earlier updates relating to Economic Substance legislation in the BVI are available here and here.

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Digitalization of AML laws in BVI
Wed, 17 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/digitalization-of-aml-laws-in-bvi/
http://www.harneys.com/insights/digitalization-of-aml-laws-in-bvi/
There is a saying that “time and tide wait for no man”, and the same is true for the ever-changing ecosystem of the financial services industry – you simply cannot stop the wheels of commerce from turning. And when they turn, the surrounding legal framework must keep pace and embrace the evolving environment as fast as it is practically able to.

Given the speed at which market conditions demand that business must be transacted today, financial technology and e-commerce are paramount in ensuring that clients receive the desired result within the required timeframe. In this regard, British Virgin Islands (BVI) corporate vehicles are very popular due to their flexibility and practical application.

BVI companies have been used for a broad range of purposes in the past 35 years, and the one constant denominator throughout that time is the fact that legislation in the BVI has kept pace with worldwide legal evolution, and still remains at the forefront of modern day transactions.

One area in which the BVI has always sought to take a market leading position is the prevention of anti-money laundering and terrorist financing. Part of this is due to BVI’s status as a British Overseas Territory, and part is a result of the proactive approach of the domestic government to international initiatives.

In an era where the smartphones many of us carry in our pockets are more powerful than the computers of the 1990s, the BVI has correspondingly improved processes in this specific area to ensure they match the advanced capabilities in the digital space. This article explores some of the key ways in which the law has recently evolved to keep pace with technology.

Electronic verification now feasible

The BVI’s Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (AML code) was amended in 2018 to allow registered agents (RAs) in the BVI who are licensed to incorporate BVI companies to utilise various forms of digital verification of customers, and to receive electronic documents instead of traditional “wet ink” documents. This amendment has revolutionised the way that traditional client due diligence (CDD) is performed and represents a positive step by the BVI’s Financial Services Commission towards embracing the new wave of e-business and the practicalities of the modern age.

Reliance on third parties

The updated legal position under the AML code not only allows entities to use electronic and digital means to verify the identity of their client, but also to engage and rely on the data provided by third parties who carry out formalised verification processes. This has enabled RAs to engage reputable third-party providers to set up electronic applications (e-Apps) that allow for faster collection and processing of CDD. To effectively outsource this function, RAs need to be satisfied that the third party:

Is independent from the RA itself, and from the customer to whom the verification relates;

Has transparent processes that can be reviewed and assessed by the RA;

Has not been convicted of a criminal offence or sanctioned for breach of data, or providing misleading data; and

Obtains and stores information that is sufficiently extensive, accurate and reliable.

As a part of this engagement, RAs will need to record the steps taken when engaging with the third-party provider, including the approval of the third party’s policies and procedures and confirmation that the third party is satisfying all of the legislative conditions necessary for the provision of the service, both in their jurisdiction of domicile as well as pursuant to the AML code. Where the third party is engaged on a long-term basis, the business will need to be reviewed by the RA once every three years.

Even though a third party may be engaged and meet all of the criteria as set out in the AML code, it should be noted that where electronic or digital verification does not make any significant discovery in relation to the underlying client that could have otherwise been accessible by reasonable (and more traditional) efforts, then the responsibility lies with the RA to remedy that breach.

Alternatives to certified documents

Traditionally, the AML code has prescribed that RAs must follow very specific guidelines around reliance on copies of documents, including certain fixed statutory requirements such as particular certification language and detailed information on the certifier (depending on the type of document). Having electronic or digital verification in place has allowed for some flexibility and practicality in this area, which was previously a very time consuming element of CDD.

Now, a long-form certified copy of a document such as a passport or utility bill will no longer be required from a customer using an e-App or an electronic portal, unless of course there is some doubt as to the authenticity of the electronic copy, or if the electronic report returns a particular factor that will mean the RA has to conduct enhanced due diligence upon that particular individual. Where such a concern exists, or where the RA does not have access to such software, the AML code still allows for the traditional method to be used.

Non-face-to-face business relationships

Another recent welcome change to the AML code was the revised position in relation to non-face-to-face business relationships. Where an RA uses electronic methods to verify who the customer is, as opposed to face-to-face verification, there is no need to apply any enhanced checks unless there is some doubt as to who the customer is, or there is a possibility of a high-risk element being involved.

This will be very familiar to those who have crossed international borders of late, whereupon entering countries they are often cleared through an automated computerised system that verifies who the passenger is, and that their documents are valid, as opposed to face-to-face contact with an officer at border security. The system is highly efficient and user friendly, and affords the RA a faster processing and turnaround time so as to deliver results in real time to customers.

Adoption of these amendments

The adoption of these user friendly and highly modernised laws in the BVI represents a firm commitment to acknowledging and embracing the use of technology in the financial services sector, which is in turn supported by a solid and focused regulatory legal framework. Enabling RAs and other firms to offer customers access to such products on devices such as their smartphones is critical to ensuring that the BVI remains the domicile of choice in international business and finance.

The adoption of these new policies and procedures into the AML code has been hugely welcomed and embraced by RAs and the private sector at large in the BVI, who treasure the foresight that its public sector has shown to demonstrate that the BVI is once again a cutting-edge jurisdiction in this area of law and regulation.

This article was originally published by Vantage Asia.

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Cayman Islands: FATCA and CRS reporting deadline extended to 31 July 2019 and confirmation of CRS Reportable Jurisdiction list
Mon, 15 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-fatca-and-crs-reporting-deadline-extended-to-31-july-2019-and-confirmation-of-crs-reportable-jurisdiction-list/
http://www.harneys.com/insights/cayman-islands-fatca-and-crs-reporting-deadline-extended-to-31-july-2019-and-confirmation-of-crs-reportable-jurisdiction-list/
Cayman Islands reporting Financial Institutions (FIs) have been given until 31 July 2019 to complete their FATCA and CRS reporting for the 2018 calendar year without the fear of further action by government authorities, the Cayman Islands government announced last week.

Although the statutory deadline for FATCA and CRS reporting remains 31 May 2019, provided that FIs have completed their reporting on or before 31 July 2019, no compliance or enforcement measures will be taken or penalties applied for late filing. FIs that fail to meet the 31 July deadline, may be subject to compliance reviews by the Cayman Islands Department for International Tax Cooperation.

There has been no change to the notification deadline, which remains 30 April 2019. This deadline applies to all new FIs since 2018.

FIs are urged to file all returns (including those outstanding from years 2014 through 2017) as soon as practicable as access to the AEOI portal may be affected by increased activity closer to the filing deadline.

FIs with CRS reporting obligations are reminded that, in addition to any reportable jurisdiction returns filed, they must file a ‘nil filing declaration’ in order for their obligations to be fully discharged. Although not mandatory, Harneys recommends that FIs file ‘nil returns’ in respect of their FATCA reporting if they have no US Reportable Accounts as positive proof of compliance with the FATCA regulations.

The Cayman Islands government also confirmed that there has been no change to the CRS Reportable Jurisdiction list from that issued on 1 February 2018 which can be found here.

Key dates

Please contact Hazel O'Brien or your usual Harneys contact if you would like advice on any aspect of the AEOI regime in Cayman and how to comply with it or if you have any other questions or visit www.harneys.com/Cayman.

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Deadline approaches for BVI registered agents and trust companies to regularise the status of regulated subsidiaries
Thu, 04 Apr 2019 00:00:00 +0100
http://www.harneys.com/insights/deadline-approaches-for-bvi-registered-agents-and-trust-companies-to-regularise-the-status-of-regulated-subsidiaries/
http://www.harneys.com/insights/deadline-approaches-for-bvi-registered-agents-and-trust-companies-to-regularise-the-status-of-regulated-subsidiaries/
The Banks and Trust Companies Act, 1990 (the Act) has been amended by the Banks and Trust Companies Act, 2018 (the Amendment Act) which requires BVI licensed registered agents and trust companies to remove listed subsidiaries from their licences and apply to have them separately licensed where necessary. The Amendment Act was gazetted on 3 August 2018 and came into force on 1 October 2018.

Subsidiaries to be removed from the licence of licensees

The Amendment Act clarifies that where, prior to the coming into force of the Amendment Act, a company engaged or approved to engage in company management or trust business was listed in a schedule of the licence of a Class I or Class II trust licence, or a Class III licensee as a subsidiary of the licensee, that company must no later than 30 June 2019, submit a written application to the BVI Financial Services Commission (the Commission) to be separately licensed. As a consequence, the provisions of the Act dealing with adding and removing subsidiaries to the licences of licensees have been repealed.

Where a company fails to comply with the requirement to remove subsidiaries from its licence after the deadline stipulated above, the subsidiary in question would be deemed to have ceased to be listed in the schedule of the licence of the Class I or Class II trust licensee or the Class III licensee. Further, all licensees holding Class I or Class II trust licences or Class III licences and on whose licence, a company is listed as a subsidiary, must surrender its licence to the Commission by 31 July 2019. The Commission will re-issue the Class I or Class II trust licensee’s or the Class III licensee’s licence but without a list of any subsidiary included on the licence.

Affected subsidiaries can each opt to make an application to the Commission for its own licence, merge with the parent licensee or liquidate. The decision as to which option is to be taken by an affected subsidiary is really a commercial one depending on the structure of the group in which the subsidiary is a member and the need and scope required for the subsidiary going forward.

However, in considering its options, it is to be noted that, a Class I or II trust licensee or Class III licensee cannot merge into a company that is listed as a subsidiary on its licence unless the company has applied for and obtained a separate licence under the Act. On the other hand, however, a company that is listed as a subsidiary on the Class I or II trust licensee’s or Class III licensee’s licence may, before 30 June 2019, merge into a licensee.

A company that is listed in the schedule of a Class I or Class II trust licence or Class III licence that engages in company management or trust business after the deadline stipulated in section 9 of the Act without obtaining a separate licence commits an offence and is liable on conviction to a fine not exceeding US$50,000.

What are the reasons for this move by the Commission?

For a number of years the Commission, international organisations and the industry have noted shortcomings with the current regime, some of which include the following:

Financial services legislation does not expressly provide for subsidiaries to comply with the regulatory obligations (eg dispositions of significant interest and appointment of directors etc).

The Commission has encountered resistance from some licensees who maintain that the subsidiaries are not licensees and do not need to comply with any regulatory obligations.

The Commission has communicated that authorising subsidiaries to provide services such as registered agent services is contrary to section 91(3) of the BVI Business Companies Act.

The need for the number of licences issued by the Commission to reflect the actual number of registered agents conducting regulated activity in the BVI. This is important to provide comfort to international financial examiners who have raised the issue as to why the Commission has more registered agents providing registered agent and registered office services than it has licensees – the reason being that subsidiaries which do not hold their own licence, are authorised to provide registered agent services.

There is regulatory concern that the Commission does not have full regulatory oversight of entities that it has authorised to conduct regulated business. In order to address this issue, the Commission ceased approving subsidiaries to act as registered agents in 2018 and has amended the legislation to include subsidiaries in the definition of a licensee in order to enable the Commission to take enforcement action against subsidiaries.

Licensees should note their obligations against the upcoming deadlines in relation to their subsidiaries and comply accordingly in order to avoid possible enforcement action.

Other changes brought in by the Amendment Act

Other changes reflected in the Amendment Act include a definition for registered agent; allowing registered agents to act as registered agent to entities other than those incorporated under the BVI Business Companies Act and the Partnership Act. These now include other corporations incorporated under or pursuant to an enactment, including the newest baby to join the family of available BVI companies, the micro business company.

The functions of an authorised agent have also been amended to include accepting service and other legal processes on behalf of a licensee.

The Amendment Act also added two new classes of licences, namely, the Class IV trust licence, for the purposes of carrying on trust business and company management business by family offices and other closely held groups; and a Class V licence, for the purposes of carrying on company management business only by family and other closely held groups. The holder of a Class IV trust licence is restricted to administering no more than 500 BVI companies and 50 trusts, must have a physical presence in the Virgin Islands and must not engage in introduced or third party business. The holder of a Class V licence is restricted to administering no more than 300 BVI companies, must have a physical presence in the Virgin Islands, must not engage in any trust business and must not engage in introduced or third party business. The Regulatory Code 2009 may be updated to define the nature and scope of these family operated businesses and other closely held group business.

Harneys is the only firm in the BVI with a dedicated regulatory practice and has dedicated and experienced regulatory lawyers. Please feel free to reach out to any member of the Harneys Regulatory practice group or your usual Harneys contact should you require any assistance with any of the foregoing.

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Revisions to financing and money services regulation in the British Virgin Islands following 2018 consultation
Thu, 28 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/revisions-to-financing-and-money-services-regulation-in-the-british-virgin-islands-following-2018-consultation/
http://www.harneys.com/insights/revisions-to-financing-and-money-services-regulation-in-the-british-virgin-islands-following-2018-consultation/
Following a consultation process arranged by the BVI Financial Services Commission (FSC) in 2018, in which Harneys was heavily involved, the regulator instructed the BVI government to revise and update the jurisdiction’s financing and money services regime to do two things:

firstly, to make it fit for purpose for local businesses based purely in the BVI which were involved in consumer financing, lending and on-the-ground money (payment) services; and

secondly, to prepare the groundwork for the BVI’s drive to become a hub for international FinTech businesses.

What happened?

The Financing and Money Services Act 2009 (the FMSA) was recently amended by the Financing and Money Services (Amendment) Act 2018 (the Amendment), taking effect on 1 March 2019. This article looks at the various substantive changes to the FMSA made by the Amendment including the changes to the meaning of financing business and Class F licence which can now be issued under the FMSA.

By way of background, the FMSA regulates financing business and money services business in the BVI. Contained within the FMSA is a prohibition against any person carrying on, or holding himself out as carrying on, “financing business” or “money services business” unless that person is licensed under the FMSA or otherwise falls within an exemption.

Widening of financing business regulation

Following the Amendment, the definition of financing business in the FMSA now covers the following types of BVI financing business:

the business of providing credit[1] under financing agreements[2] to borrowers resident in the BVI;

the business of providing credit, including pay day advances, or consumer finance loans, under a financing agreement to a borrower in the BVI;

the business of leasing[3] property to a person resident in the BVI under a financing lease[4]; and

(once implemented by subsidiary legislation) the business of conducting international financing and lending business in relation to a Class F licence.[5]

Limbs (1) to (3) are generally intended to capture domestic island-based financing business within BVI rather than international business involving BVI companies around the world.

In relation to limb (2) of the definition of financing business, the Amendment provides that a “consumer finance loan” is a loan of money, credit, goods or choses in action including, except as otherwise specifically prescribed, provision of a line of credit, in an amount or of a value which is not less than US$5,000 and not more than US$35,000 for which the lender charges, contracts for, collects or receives interest at a rate prescribed unless the borrower has defaulted. To the extent that the thresholds referred to are not triggered then the transaction will not be subject to the FMSA.

The introduction of consumer finance regulation followed the results of the 2018 consultation process.

Widening of money services regulation

Money services business now includes some new business activities and captures, dispensing money, facilitating deposits, payments, transferring money, reporting account information via automated teller machines (ATM) and transmitting money in any form, including electronic money, mobile money or payments of money.

New classes of licences have been developed

Prior to the Amendment, a person could have only held a financing business licence or a money services business licence depending on the nature of their activity. However, with the Amendment in place the categories of licences have been expanded to include the following:

Class A: which allows a licensee to carry on business of transmitting money in any form, including electronic and mobile payments of money;

Class B: which allows a licensee to carry on the business of issuing, selling or redeeming money orders or travelers cheques, cheque cashing and currency exchange;

Class C: which allows a licensee to engage in financing business;

Class D: which allows a licensee to carry on the business of financing lease;

Class E: which allows a licensee to carry on the business of operating an ATM;

Class F: which allows a licensee to carry on the business of international financing and lending in the peer-to-peer (P2P) FinTech market, including peer to business (P2B) and business-to-business (B2B) markets; and

Class G: which allows a licensee to carry on the business of such other service as may be specified on the regulations.

Class F licence: Special licensing for international financing and lending

The FMSA now provides for the issuance of a special class of licence for entities that are engaging in international financing and lending ie the Class F licence. This class of licence represents a positive and progressive step on the part of the FSC to embrace the age of FinTech and to accommodate more modern and sophisticated methods for facilitating financing transactions.

The licence will be relevant to BVI business companies and qualifying foreign companies licensed under the FMSA which operate in the following markets:

the P2P FinTech market: this involves the lending of money to individuals or business through online services that match lenders with borrowers;

the P2B market: this is an alternative to a traditional bank loan and can be a great asset to small business start-ups looking for funding to expand, take on staff or to cover day-to-day expenses; and

B2B markets: this is the electronic exchange of capital between businesses.

The Class F licence was designed with start-up companies in mind and is very much designed to offer a “light touch” regulatory regime, aimed at permitting licensed entities with a certain amount of latitude to conduct various trials of new products. Further guidance in the form of subsidiary legislation is being developed to give context to this new licensing regime.

Maintenance of capital resources and deposit

To the extent that the capital resources fall below the standard set by the Regulatory Code 2009 the licensee would need to notify the FSC and the licensee will need to prepare and submit a plan as to how it intends to rebuild its capital resource to the required regulatory levels. This has to be done within 30 days and failure to do so could result in enforcement action taking place.

Duty of management to ensure the licensee complies with the law

Personal liability is now imposed on individuals in senior management positions to the extent the licensee fails to comply with the FMSA and any of the financial services legislation relevant to money laundering, terrorist financing and proliferation financing. The penalty can be in an amount up to US$30,000.

Segregation of customer assets

To the extent that the licensee receives monies from customers there should be no commingling of the licensee’s money and the customer’s money. Strict separation of assets should be in place.

Prohibition on solicitation or receipt of money

No person may solicit or receive money from another person in relation to conducting financing business or money services business in or from within the BVI. If this takes place that is considered to be an offence and strict penalties apply, US$50,000 in the case of an individual or US$75,000 for a corporation.

Consumer protection measures

The FSC can provide consumer measures for licensees that may include placing restrictions on interest rates, allowing or requiring instalments payments, limiting excessive charges and requiring loan statements and receipts to be provide to customers.

These recent updates to the FMSA highlight the ever progressive and forward thinking approach which has become the hallmark of the BVI financial services industry and demonstrate its ongoing ability to adapt to the constantly evolving global financial environment and to set the trends for others to follow.

If you have any questions, please contact Mirza Manraj or your usual Harneys contact.

[1] Credit refers to a cash loan, a deferred payment and any other form of financial arrangement.

[2] A financing agreement is an agreement which outlines the terms of credit between parties, most typically between a lender and a borrower.

[3] A lease is an agreement where a person ie the lessor grants another person ie the lessee the right to possession and use of any movable/immovable property for an agreed period in return for a periodic payment.

[4] A financing lease is a lease where the property to be leased is acquired by the lessor from a third party ie the supplier for the purpose of leasing it to the lessee under the lease.

[5] This is a class of licence issued under the FMSA which permits the holder to carry on the business of international financing and lending in the peer-to-peer FinTech market, including business-to-business markets.

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Public consultation on liquidity stress testing guidance for AIFs and UCITS
Wed, 27 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/public-consultation-on-liquidity-stress-testing-guidance-for-aifs-and-ucits/
http://www.harneys.com/insights/public-consultation-on-liquidity-stress-testing-guidance-for-aifs-and-ucits/The European Securities and Markets Authority (ESMA) has published a consultation paper (Consultation Paper) (found here) providing a set of proposed guidelines on how liquidity stress testing (LST) should be applied by alternative investment funds (AIFs) and Collective Investment in Transferable Securities (UCITS), in response to the recommendations set out by the European Systemic Risk Board (ESRB) in April 2018 (found here).

The ESRB recommendations aim at developing guidance on the practice to be followed by managers for the stress testing of the liquidity risk for individual AIFs and UCITS. The ESRB encouraged ESMA to establish common practice guidelines for managers in respect of the design of LST scenarios, the LST policy, considerations for the asset and liability sides of investment fund balance sheets and the required timing and frequency of LST. The proposed guidelines set out in the Consultation Paper aim at promoting convergence in the way national competent authorities supervise fund LST across the European Union (EU).

LST is a process carried out by fund managers, the aim of which is to test the resilience of funds in respect of a variety of market risks, including liquidity risk which is an existing requirement under the Alternative Investment Fund Managers Directive (AIFMD), the Money Market Funds Regulation (MMFR) and UCITS. The Consultation Paper sets out the fund managers’ practical considerations and minimum standards to be taken into account in order for them to improve their LST procedures.

The proposed guidelines are applicable to managers of UCITS and EU Alternative Investment Fund Managers (AIFMs), EU depositaries overseeing UCITS and EU AIFs. The draft guidelines also clarify that exchange traded funds (ETFs) and money market funds (MMF) are also within scope. The draft scope also proposes that leveraged closed ended AIFs be in-scope consistent with obligations of such funds under the AIFMD. The contents of the Consultation Paper should further be of interest to trade associations, investors and consumer groups relating to UCITS and EU AIFs.

ESMA invited the comments and suggestions of relevant parties on all matters raised in the Consultation Paper, which will be published following the close of the consultations, unless the parties indicate otherwise. ESMA will review all comments received by 1 April 2019.

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Cyprus Ministry of Finance presents draft EU Anti-Tax Avoidance Directive
Wed, 27 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/cyprus-ministry-of-finance-presents-draft-eu-anti-tax-avoidance-directive/
http://www.harneys.com/insights/cyprus-ministry-of-finance-presents-draft-eu-anti-tax-avoidance-directive/
The Cyprus Ministry of Finance has presented a draft bill implementing the EU Anti-Tax Avoidance Directive (ATAD) which aims to combat corporate tax avoidance and create a level playing field for businesses operating within the EU. The draft legislation contains five anti-abuse measures relating to controlled foreign companies (CFC), interest limitation, a general anti-abuse rule (GAAR), exit taxation and hybrid mismatches. Once ATAD is implemented, the first three measures will apply retroactively as from 1 January 2019 whereas the latter two are expected to enter into force on 1 January 2020.

Interest limitation

Currently, interest expenses are deductible if the arms’ length principle is adhered to and if the income in question is not tax-exempt. ATAD introduces an interest deductibility rule which limits the deductibility of borrowing cost to 30 per cent of the taxable earnings before interest, tax, depreciation and amortisation or €3 million, whichever is higher. For a group of Cyprus companies, the deductibility limit applies for the total borrowing cost of the group. Financial institutions and public infrastructure projects are exempted and there is a grandfathering clause under which loan arrangements entered into before 17 June 2016 (and not thereafter amended) are also exempted. “Standalone entities” (an entity which is not part of a consolidated group for financial accounting purposes and has no associated enterprise) also fall outside the scope of the interest limitation rule. An equitable allowance is permitted allowing full deduction if the taxpayer can demonstrate that the ratio of its equity over its total assets is not more than two percentage points lower than the equivalent ratio for the group as a whole.

Unused interest costs may be carried forward for up to five years.

General anti-abuse rule

The GAAR is introduced as a general catch-all provision aimed at disregarding artificial arrangements (or series of arrangements) which have been put into place for the main purpose of obtaining a tax advantage that defeats the object or purpose of the applicable tax laws and which having regard to all relevant facts and circumstances, are not genuine. The Cyprus Assessment and Collection of Taxes Law already contains a GAAR so introduction of this provision is not expected to impact Cyprus laws.

Controlled foreign companies

A CFC is defined as a company or a permanent establishment directly or indirectly controlled by a Cyprus tax resident company, the corporate profit tax burden of which is less than half of what it would be under the Cyprus tax system. The CFC provisions in ATAD aim to allocate income at the Cyprus level if the CFC of the Cyprus entity is not taxed or is taxed at a very low rate, even if the subsidiary income is not in fact distributed to Cyprus. Under this rule, the income of the qualifying subsidiary which is not distributed must be included in the tax base of the Cyprus parent if the income arises from non-genuine arrangements which have been designed with an aim to obtain a tax advantage, unless the subsidiary is resident in the EU/EEA and is engaged in substantive economic activity.

Exit taxation

The draft provisions relating to exit taxation provide that taxpayers shall be liable to tax at an amount which is equal to the difference between the market value and the value for tax purposes of the assets to be transferred outside the net of Cyprus tax while remaining under same ownership. The exit taxes may be paid in instalments over a period of five years.

Hybrid mismatches

A hybrid mismatch is an arrangement which aims to exploit differences between tax systems so as to obtain an advantage. The effect of a hybrid mismatch is usually a double deduction (a deduction in both Member States) or a deduction of the income in one Member State without inclusion in the tax base of the other Member State (a deduction without inclusion). ATAD contains provisions to counteract cross-border hybrid mismatches so that the deduction of a payment leading to the double deduction or inclusion is denied in one of the two jurisdictions. So if a hybrid mismatch occurs, the operating expenses in relation to the mismatch will not be deductible to the extent that they are deductible in another Member State where their source is located and are not taxable in another Member State receiving the income.

Conclusion

Clients should assess the practical impact of the implementation of the new ATAD measures on their Cyprus entities or groups, particularly with respect to financing structures, identifying entities that may exceed the 30per cent limit, and with respect to Cyprus holding companies, where subsidiaries under the new legislation may be construed as CFCs.

The foregoing is for general information only and not intended to be relied upon for legal advice in any specific or individual situation. If you have any questions, please contact Emily Yiolitis or your usual Harneys contact.

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EU confirms BVI and Cayman Islands co-operation on tax
Tue, 26 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/eu-confirms-bvi-and-cayman-islands-co-operation-on-tax/
http://www.harneys.com/insights/eu-confirms-bvi-and-cayman-islands-co-operation-on-tax/
The European Union has confirmed that the British Virgin Islands and Cayman Islands have not been included on the EU’s updated list of non-cooperative jurisdictions for tax purposes (known as the EU blacklist), which was published on 12 March 2019. The EU’s decision confirms that both jurisdictions have implemented tax good governance principles which address the EU’s earlier concerns on the economic substance of certain entities in low (or like the BVI and Cayman Islands no) tax jurisdictions.

Both the BVI and Cayman Islands introduced legislation with effect from 1 January 2019 which requires certain legal entities carrying on specific relevant activities to demonstrate adequate economic substance in the jurisdiction. The legislation in each jurisdiction follows closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories.

Our earlierupdates summarise which relevant entities now have to demonstrate economic substance in each of the BVI and Cayman Islands and the reporting obligations that apply. Further detailed guidance notes are expected to be issued in the BVI in the coming weeks, with sector specific guidance anticipated in the Cayman Islands expanding on the existing guidance notes. Details of the jurisdictions now included on the EU’s blacklist of non-cooperative jurisdictions, grey list pending further guidance from the EU and white list are also available here.

There will also be further cooperation between the EU and BVI/Cayman Islands during 2019 to define acceptable economic substance requirements and further technical guidance for collective investment funds in those jurisdictions. We anticipate that these discussions will take into account that the global standard on economic substance for relevant financial and corporate entities issued by the OECD does not include collective investment funds.

Harneys has worked closely with the BVI government on the BVI’s economic substance legislation and we are regularly advising clients to help them understand the impact (if any) of the economic substance requirements in the BVI and Cayman Islands and the measures that entities need to take to ensure compliance. We believe that, for many entities, the impact will be minimal and compliance will be straightforward. Please contact your usual Harneys contact or any of Ross Munro, Phil Graham, Amy Roost or Josh Mangeot with any questions on compliance with the BVI’s laws, or Matt Taber with any questions on compliance with Cayman Islands laws.

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How a US Discovery Statute can affect Cayman Litigation
Fri, 22 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/how-a-us-discovery-statute-can-affect-cayman-litigation/
http://www.harneys.com/insights/how-a-us-discovery-statute-can-affect-cayman-litigation/
Section 1782 of Title 28 of the U.S. Code is increasingly being used by parties in Cayman Islands litigation as an additional tool to obtain court-ordered discovery from parties in the United States. Given the regular involvement of entities resident in the U.S. in Cayman litigation, the option to use the statute as an "offensive" weapon in such litigation may appeal to litigants, particularly those concerned that discovery through the Cayman proceedings will not yield particular, or wide-ranging, documents or information. ]]>
The European Commission’s anti-money laundering blacklist: diplomacy or bust (in this case, bust)
Wed, 20 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/the-european-commission-s-anti-money-laundering-blacklist-diplomacy-or-bust-in-this-case-bust/
http://www.harneys.com/insights/the-european-commission-s-anti-money-laundering-blacklist-diplomacy-or-bust-in-this-case-bust/
The move by all of the European Union’s (EU’s) member states to block the European Commission’s recent anti-money laundering blacklist, mostly as a result of the political damage caused by the inclusion of Saudi Arabia and a number of US territories, arguably demonstrates that perceived “objective” criteria cannot be the only determinant of whether a country gets onto such a list. Politics dictates that some countries simply must not be included.

Background to the list

Much was made of the desire to move away from “white-lists” under revisions to the EU’s Fourth and Fifth Anti-Money Laundering Directives (4AMLD and 5AMLD respectively) and instead to a more “risk-based”, tailored approach to KYC and customer identification. Nevertheless the concept of a blacklist never really went away: an anodyne list covering the 16 countries considered to be “high risk third countries” for anti-money laundering and terrorist financing (AMLTF) purposes and, importantly, designated by the Financial Action Task Force (FATF) which became officially recognised by the EU on the passing of the 5AMLD in July 2018.

The list once again re-entered popular discussion following the publication on 13 February 2019 by the Commission of an expanded list of 23 countries including some politically sensitive choices. A copy of the publication, in the form of a draft Commission delegated regulation is here.

Inclusion on the list carries no outright penalty but it is highly relevant for determining enhanced due diligence measures that need to be taken by EU financial institutions and other “obliged entities” under 5AMLD-related rules.

Criteria used

The most recent, now rejected list was produced by the Commission on the basis of criteria set out in the 5AMLD and related implementing measures. Under the Commission’s approach an assessment was conducted of 54 “priority” jurisdictions looking at the levels of existing threat posed, their legal frameworks and controls currently in place, as well as the effectiveness of implementation of AMLTF rules.

According to the Commission a country posing a risk to the international financial system and identified by the Financial Action Task Force (FATF) as a high-risk jurisdiction is presumed to represent a risk to the EU internal market as well. Additionally, the Commission has stated that it also wanted to adopt its own methodology for assessing high-risk third countries; hence in identifying the countries on the list on the basis of its own expertise and other sources such as Europol.

The list of 23 comprised:

12 countries listed by FATF as being AMLTF-deficient (generally non-controversial ones) and

All 23 were considered by the Commission to have strategic deficiencies in their AMLTF frameworks. Interestingly, despite the initial strong objections of some quarters of the EU, in particular from the UK, the revised list of 23 countries included Saudi Arabia, Panama and four US territories; Puerto Rico, Guam, the US Virgin Islands and American Samoa.

FATF reaction, US condemnation

In a surprising turn of events, shortly following the issuance of the Commission’s list the FATF’s President, Marshall Billingslea[1], commented that “[t]here are obvious questions as to whether (a) list elaborated outside of the FATF, or without our involvement or help, helps or undermines this leading role of our organisation”.

The US Department of Treasury followed up, on the same day as the publication that the Commission’s process for developing its list contrasts starkly with FATF’s thorough methodology. According to US Treasury, the Commission’s process:

did not include a sufficiently in-depth review necessary to conduct an assessment related to such a serious and consequential issue;

provided affected jurisdictions with only a cursory basis for its determination;

notified affected jurisdictions that they would be included on the list only days before issuance; and

failed to provide affected jurisdictions with any meaningful opportunity to challenge their inclusion or otherwise address issues identified.

Treasury also rejected outright the inclusion of US territories on the list noting that the commitments and actions of the US in implementing the FATF standards extended to all of its territories and that it was not provided with any meaningful opportunity to discuss the basis for the listing beforehand.

EU-turn

The list of 23 was unanimously rejected by the EU's Council on 7 March 2019 which stressed the need for introduction of such list in “an orderly process” in order to achieve the full impact of this instrument to improve the AMLTF regime.

The Council refused to support the Commission’s proposal, commenting that it “was not established in a transparent and resilient process that actively incentivises affected countries to take decisive actions while also respecting their right to be heard” and was not sufficiently autonomous.

The Council called for a revised EU listing that is proportionate to the EU’s high standards, in line with the provisions of the 5AMLD. The link to the relevant public statement of the Council can be found here.

In summary, the Commission is going back to the drawing board on this one.

If you have any questions, please contact Aki Corsoni-Husain, Marina Stavrou or your usual Harneys contact.

[1] Mr Billingslea also serves as Assistant Secretary for Terrorist Financing in the U.S. Department of the Treasury and in 2018 spearheaded US initiatives to combat corruption, money laundering, and other financial threats in various European countries, including in Latvia and Cyprus.

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European Supervisory Authorities recommend a pan-EU approach to crypto regulation
Tue, 19 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/european-supervisory-authorities-recommend-a-pan-eu-approach-to-crypto-regulation/
http://www.harneys.com/insights/european-supervisory-authorities-recommend-a-pan-eu-approach-to-crypto-regulation/
Since the crypto bubble of 2017 many national regulators around Europe and beyond have been moving to implement regulatory regimes within their jurisdictions so as to place themselves as “market leaders” in crypto and FinTech regulation. However, within the EU it is fair to say that the industry, and public sector, have been waiting with anticipation to see where the EU moves to next on this topic – and in particular whether we will have a harmonised regime for crypto regulation in Europe.

While the ESMA and EBA reports described below keep the powder on this topic dry to an extent, telltale signs suggest that pan-EU regulation in crypto, beyond merely anti-money laundering issues, may be on its way.

The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published reports, on 9 January 2019, to the European Commission on the suitability of current European Union (EU) legislation to crypto-assets and Initial Coin Offerings (ICOs).

Even though reports confirmed that the current levels of crypto-assets-related activity in the EU neither impedes nor negatively impacts financial stability in the EU, both authorities highlight the fact that some crypto-asset activities are not caught by the current EU financial services framework and as a result several ambiguities in the applicability of the current regulatory regime arise causing important operational risks both to investor protection and market integrity which need to be carefully addressed.

The EBA report

The EBA’s report highlights several concerns regarding crypto-regulation, of these the key points in our view are as follows.

The EBA acknowledges money laundering and consumer risks posed by crypto-assets because crypto-related ‘financial’ services are not generally perceived as being subject to regulation under the banking, payment services and electronic money framework set out in the Capital Requirements Regulation (EU) No. 575/2013 (CRR); the Second Payment Services Directive 2015/2366/EU (PSD2) or the Electronic Money Directive 2009/110/EC (EMD).

There is a pervasive lack of clarity on the treatment of crypto-assets under current EU regimes which has led at times to a degree of misalignment between them: for example, crypto-assets are not recognised as money under the CRR, but may be recognised as “electronic money” under EMD and as “funds” under PSD2 in certain circumstances.

The EBA outlines in detail the applicability of current accounting and prudential regulatory frameworks as they relate to crypto-assets. The main issue, and what is being seen on a global basis, is that the current regimes, designed pre-2017, simply do not contemplate crypto-asset technology. Allied to this, the EBA notes that the Basel Committee for Banking Supervision (BCBS) is actively engaged with the EBA with respect to the prudential regulatory treatment of crypto-assets.[1]

The EBA report notes the lack of clarity at international accounting standard level as to whether crypto-assets would be recognised as an intangible asset. It is worth noting that, at the time of writing, various analyses have been completed by specialist International Financial Reporting Standards (IFRS) advisors that deal with challenges facing crypto-asset accounting. These focus on the constantly evolving nature of crypto-assets together with the lack of relevant formal accounting pronouncements. The prevailing view is that crypto-assets would generally meet the definition of intangible assets under IFRS. This analysis naturally has an impact on the prudential regulatory treatment of crypto-assets.[2]

As regards valuations of crypto-assets, the EBA report suggests that a “conservative approach” should be taken for exposures, pending further regulatory developments and the outcome of the BCBS analysis. It remains to be seen how this may impact, for example, the treatment of crypto-asset derivatives under the mark-to-market method. The conservative approach may mean that crypto-assets will be treated under CRR in a similar way to exotic commodities (ie those which are not precious metals).

Finally, and perhaps most importantly, the EBA has urged the Commission to address the possibility of an EU-wide regulatory approach on crypto-assets. More specifically EBA notes that the Commission should carry a cost/benefit analysis, considering issues inside and outside the financial sector so as to assess if any regulatory action is required to achieve a common EU approach to crypto-assets. The report also advised the Commission to consider the Financial Action Task Force’s (FATF) recommendations of October 2018 and to take steps to promote consistency in the accounting treatment of crypto-assets.

ESMA’s report follows a request by the Commission in its 2018 FinTech Action plan calling European Supervisory Authorities such as ESMA to assess the suitability of the current EU regulatory framework on ICOs and crypto-assets.

ESMA’s report acknowledged that the gaps in the current regulatory regime on crypto-assets arise mainly as a result of their ambiguous legal status and, in particular, whether they are recognised as “financial instruments”.

As with the EBA report ESMA acknowledges that under certain circumstances some crypto-assets may qualify as “transferable securities” or other types of financial instruments within the meaning of the Markets in Financial Instruments Directive 2014/65/EU (MiFID II). To reach this conclusion ESMA has been cooperating with national competent authorities (NCAs) and has noted that while transposing MiFID II into national law, the interpretation of the term “financial instruments” differs from one NCA to the other resulting in regulatory and supervisory issues.

The report also outlines that many financial rules under secondary legislation including the Prospectus Directive, the Transparency Directive, MiFID II, the Market Abuse Directive, the Short Selling Regulation, the Central Securities Depositories Regulation and the Settlement Finality Directive will apply to those crypto-assets which qualify as financial instruments and transferable securities under MiFID II.

Nonetheless, the report highlights the existence of gaps and ambiguities in the current regulatory regime of crypto-assets which should be addressed by the Commission. In particular, the report calls for greater clarity and certainty in respect of the types of services that may qualify as custody / safekeeping activities under the EU financial services framework as well as the concepts of settlement and settlement finality which apply to crypto-assets. Importantly, ESMA acknowledges that there is currently no legal definition of “crypto-assets” in the EU financial securities laws, although Fifth Anti-Money Laundering Directive (EU) 2018/843 (5AMLD) does introduce a definition of “virtual currencies” for the first time into European jurisprudence. Under 5AMLD “virtual currencies” means a digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically.

ESMA recognises and expects that the market for crypto-assets is evolving and follow-up work will be needed with these developments. ESMA states that they will be engaging with global regulators on an ongoing basis as market developments occur. Given the prevalence of international standards increasingly being used in new offshore laws and regulations, this will likely have an impact in shaping regulation of crypto-assets going forward.

Despite the above, the report confirmed the risk which exists in case the wider regulation of crypto-assets may result in a more reckless adoption and use of same. As a result ESMA recommends warning buyers about the risks of those crypto- assets, which do not qualify as financial instruments.

Lastly, similar to the EBA report, ESMA also highlighted the importance of updated risk disclosure and anti-money laundering requirements in relation to providers of crypto-to-crypto exchange services providers as well as providers of financial services for ICOs.

NCAs across the EU and beyond should take particular heed of the EBA and ESMA reports: while they rush to regulate in the current absence of EU regulation it may soon be the case that they will have to make significant alterations to their regimes so that they comply with eventual pan-EU regulation. These reports suggest such regulation is on its way.

[1] The resulting guidance from the BCBS will extend globally and have an impact on the regulatory treatments of crypto-assets, and as such will be of relevance to Harneys non-EU jurisdictions such as the Cayman Islands and British Virgin Islands.

[2] Intangible assets are deducted from Common Equity Tier 1 items under Art 36(1)(b) of the CRR.

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Issuer Alert: Cypriot issuers listed on LSE Main Market not subject to EU mandatory takeover bids regime after a no-deal Brexit
Mon, 18 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/issuer-alert-cypriot-issuers-listed-on-lse-main-market-not-subject-to-eu-mandatory-takeover-bids-regime-after-a-no-deal-brexit/
http://www.harneys.com/insights/issuer-alert-cypriot-issuers-listed-on-lse-main-market-not-subject-to-eu-mandatory-takeover-bids-regime-after-a-no-deal-brexit/
If a no-deal Brexit goes ahead, the Main Market of the LSE would no longer constitute a “regulated market”, which would trigger a disapplication of a number of key pieces of EU capital markets legislation, including the EU Takeover Bids Directive. In this article, we consider the impact of a no-deal Brexit on the shared jurisdiction regime in the context of mandatory takeover bids legislation under Cypriot law.

Takeover Bids Law and shared jurisdiction

In Cyprus, the EU Takeover Bids Directive[1] is implemented into local law by the Cypriot Takeover Bids Law (MTO Law). Under the MTO Law, there is a “shared jurisdiction” regime of takeover bids[2] which applies to takeover offers for companies which have their registered office in Cyprus and securities admitted to trading on a regulated market in another Member State (ie the United Kingdom), provided the relevant company does not also have securities listed on a regulated market in Cyprus.

Matters reserved to Cypriot law

Under the MTO Law, the following key matters are stipulated to be governed by Cypriot law:

The trigger threshold for launching a mandatory takeover bid under the MTO Law (MTO Bid), this being where a person, as a result of his own acquisition or the acquisition by persons acting in concert with him, holds securities of a company which, added to any existing holdings of the securities held by him and the holdings of those securities of persons acting in concert with him, directly or indirectly give him a percentage of thirty per cent (30%) or more of existing voting rights in that company at the date of the acquisition.

The grounds on which an application may be made and exemption granted by the Cyprus Securities and Exchange Commission from the obligation to launch a MTO Bid.

Provisions restricting the ability of the board of directors to frustrate a MTO Bid.

Provisions regulating the squeeze out process applying where an offeror holds or has irrevocably agreed to acquire (whether as a result of a MTO Bid or otherwise) securities in the offeree company representing not less than ninety per cent (90%) of the capital carrying voting rights and not less than ninety per cent (90%) of the voting rights in the offeree company.

Provisions on sell out, enabling the holder of the remaining securities of the offeree company to require the offeror to buy his securities at a fair price.

Matters governed by English law

Under the MTO Law, the following key matters are stipulated to be governed by the laws of the country of the regulated market, in the case of the discussion of this article, English law:

The procedure for announcing a decision or intention to make a takeover bid and the subsequent procedure for conducting (or revoking) the MTO Bid. This includes the relevant timeframes within which the MTO Bid must be conducted.

The requirements on consideration and the method for determining “equitable consideration”.

The requirement to prepare an offer document and the contents of such offer document. The authority to approve such offer document is also held by the UK Takeover Panel.

No-deal Brexit

Regulated markets

The term “regulated market” is defined under the EU Markets in Financial Instruments Directive (recast) (MiFID II) and refers to trading venues within the EEA which become licensed as such. Regulated markets constitute the most strictly regulated type of trading venue within EU capital markets regulation and companies with securities listed on regulated markets are subject to a suite of European legislation aimed at strengthening investor confidence in these trading venues, including for example the EU Takeover Bids Directive.

Following a no-deal Brexit, the UK would cease to be a Member State of the European Union and would instead be considered a “third country” for the purposes of EU legislation, including such EU legislation as implemented in Cyprus.

The Main Market of the LSE will no longer constitute a trading venue within the EEA and absent special arrangements would consequently not be able to benefit from a classification as a “regulated market” within the meaning of EU capital markets legislation.

Takeover Bids

If a no-deal Brexit were to occur, the EU Takeover Bids Directive would cease to apply in the UK and in this respect the UK Takeover Panel has confirmed that it consequently intends to abolish the shared jurisdiction regime under English law[3]. As relevant to Cyprus-domiciled issuers with securities listed on the Main Market, this will mean that English law will no longer provide for partial regulation of MTO Bids under the UK Takeover Code.

Equally, under Cypriot law the Main Market would no longer constitute a regulated market and consequently the MTO Law would no longer apply to Cypriot issuers with securities listed on the Main Market. To this end the regime described above governed by Cypriot law pursuant to the shared jurisdiction regime would fall away.

Other than the MTO Law, Cyprus has not enacted any legislation which would otherwise trigger the requirement to launch a MTO Bid at the thirty per cent (30%) threshold and the squeeze out and sell out provisions of the MTO Law would cease to apply.

In a no-deal Brexit scenario and with the disapplication of the MTO Law, Cypriot issuers should consider squeeze out and sell out provisions of the Cypriot Companies Law, Cap. 113 (Companies Law).

In particular, the Companies Law provides that where a company makes an offer to purchase (the Offeror) all the shares or the whole of any class of shares (the Offer Shares), of a Cypriot company and that offer is accepted by the holders of at least ninety per cent (90%) in value of the Offer Shares, the Offeror can upon the same terms acquire the shares of the members who have not accepted the offer, unless these members can convince a Cypriot court not to permit such acquisition.

The legislative provisions contain timeframes within which the offer is made and for exercise of squeeze out or sell out rights, as well as provisions relating to the calculation of, and eligibility to count towards, the threshold for acceptance.

Additionally, Cypriot issuers may consider whether to adopt any of the substantive provisions of the MTO Law in their articles of association, for example, the trigger threshold for a MTO Bid at thirty per cent (30%).

What next?

With a potential no-deal Brexit looming, Cypriot issuers with securities listed on the Main Market should ensure they are aware of the implications on the legislative regimes governing them in the absence of the applicability of the “shared jurisdiction regime”, how these changes may affect their shareholders and should consider making, if appropriate, communications to their shareholders as to the consequences.

If you have any questions, please contact Nancy Erotocritou, Elina Mantrali or your usual Harneys contact.

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Fund finance: British Virgin Islands
Fri, 15 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/fund-finance-british-virgin-islands/
http://www.harneys.com/insights/fund-finance-british-virgin-islands/Harneys lawyers contributed a chapter in the Fund Finance 2019 Third Edition published by Global Legal Insights. The chapter gives an overview of the BVI and discusses: fund formation and finance; key developments in the jurisdiction; and the year ahead. Download the pdf to read the full article. ]]>
How to be a dutiful director: a refresher on BVI director duties, risk and mitigation
Fri, 15 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/how-to-be-a-dutiful-director-a-refresher-on-bvi-director-duties-risk-and-mitigation/
http://www.harneys.com/insights/how-to-be-a-dutiful-director-a-refresher-on-bvi-director-duties-risk-and-mitigation/“When I grow up, I still want to be a director.” – Stephen Spielberg

The esteemed Mr. Spielberg was (probably) talking about a different type of director, but being a director of a British Virgin Islands company is not the daunting task it may first appear. Acting as a director of any company, anywhere in the world, is not a task that should be taken lightly but the duties of a director of a BVI company are, as we will try to show below, relatively easy to understand and reasonably easy for prudent directors to comply with. Download the pdf to read the full article.

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Fund finance: An oﬀshore perspective
Thu, 14 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/fund-finance-an-oﬀshore-perspective/
http://www.harneys.com/insights/fund-finance-an-oﬀshore-perspective/
Harneys lawyers contributed a chapter in the Fund Finance 2019 Third Edition published by Global Legal Insights. The chapter discusses: some of the basic reasons why managers, allocators and lenders alike continue to use offshore structures; developments and trends in the fund finance market from an offshore perspective; the key issues that any transaction involving an offshore element should cover; and some ideas for future innovation. Download the pdf to read the full article. ]]>
New CIMA Rules and Guidelines on Basel III leverage ratio published
Wed, 13 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/new-cima-rules-and-guidelines-on-basel-iii-leverage-ratio-published/
http://www.harneys.com/insights/new-cima-rules-and-guidelines-on-basel-iii-leverage-ratio-published/
On 8 March 2019, the Cayman Islands Monetary Authority (CIMA) published new rules and guidelines for calculation of leverage ratios (the Rules and Guidelines).

The leverage ratio requirement is issued in line with Section 10(1) of the Banks and Trust Companies Law (2018 Revision) which permits CIMA to prescribe any such capital adequacy ratios.

This requirement is based on the Basel Committee on Banking Supervision Basel III framework as a part of post-crisis reforms, which, among other things, was aimed at preventing the build-up of excessive on-and off-balance sheet leverage in the banking system. The Basel committee on Banking Supervision highlighted that during the financial crisis, in many cases, banks built up excessive leverage while maintaining seemingly strong risk-based capital ratios.

The wording of CIMA’s leverage ratio rule largely tracks that prescribed in the Basel framework.

The leverage ratio is a non-risk based calculation which is meant to complement and add a backstop to risk-based capital calculations. The Rules and Guidelines do not adopt Basel III in its entirety; at the time of writing, the Basel II risk-based framework applies to banks that are locally incorporated in the Cayman Islands (Category A and B banks), all home regulated banks and host regulated banks (subsidiaries of foreign banks), with or without a physical presence in the Cayman Islands. The Basel III framework requires that both the leverage ratio and the more complex risk-based requirements work harmoniously together to create a more balanced and robust capital framework. Although the risk-based calculations are completed under the Basel II framework, the principle of the leverage and risk-based frameworks working together shall still apply.

As an overview, the leverage ratio is a function of a bank’s exposure measure and it’s capital measure. The exposure measure is calculated differently for different banking products entered into, being the sum of a) on-balance sheet exposures (excluding on-balance sheet derivative and securities financing transaction exposures); b) derivative exposures; c) securities financing transaction exposures; and d) off-balance sheet items. Each of these categories have a unique way of calculating their exposure measures, which are detailed in the Rules and Guidelines.

The implementation date of CIMA’s leverage ratio rules and guidelines will be 1 December 2019.

If you have any questions, please contact Thomas Gray or your usual Harneys contact.

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When common met civil
Thu, 07 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/when-common-met-civil/
http://www.harneys.com/insights/when-common-met-civil/
When a testator resides in a civil-law jurisdiction, but has assets registered in a common-law one, the jurisdictions’ legal systems may be in conflict, eg regarding local rules for forced heirs and matrimonial shares. This article, published in the March 2019 STEP Journal, gives examples of useful estate planning instruments to help mitigate risk where Russian citizens or residents hold shares in British Virgin Islands companies.]]>
Moneyval to visit Cyprus: Advisories issued to the industry
Fri, 01 Mar 2019 00:00:00 +0000
http://www.harneys.com/insights/moneyval-to-visit-cyprus-advisories-issued-to-the-industry/
http://www.harneys.com/insights/moneyval-to-visit-cyprus-advisories-issued-to-the-industry/
Moneyval experts are due to conduct a visit to Cyprus in May 2019 to assess its national framework for combating money laundering and terrorist financing, as well as the island’s overall compliance with the Financial Action Task Force’s (FATF’s) bench-mark Recommendations.

For the uninitiated, Moneyval – short for the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism – was established by the Council of Europe[1] and operates as FATF’s de facto regional sub-committee for (mostly) those European countries which are not directly members of FATF, including Cyprus and much of South-East Europe.

The visit is important for the Cypriot professional and financial services and industries as it will result in extra oversight and inspections by the national competent authorities (NCAs). Further, and in somewhat of an unusual turn, Moneyval is expected to make onsite visits to law firms and fiduciary service providers – clearly turning up the pressure for those industry participants involved.

Reaction from the Cypriot NCAs

On 31 January 2019, the Cyprus Bar Association (CBA) issued an advisory regarding Moneyval’s upcoming visit. The advisory indicated that Cypriot competent and supervisory authorities will actively participate in the assessment. The relevant authorities for present purposes would include:

the CBA itself, responsible for law firm oversight;

the Institute of Certified Public Accountants of Cyprus (known as ICPAC – or “SELK” in Greek), responsible for chartered accountancy oversight;

the Central Bank of Cyprus (CBC), responsible for oversight of banks, cooperatives, payment service providers, e-money institutions and bureaux de change;

the Cyprus Securities and Exchange Commission (CySEC), responsible for oversight of administrative services providers, investment firms, alternative investment funds and their managers and UCITS management companies among others. CySEC issued a notice on 8 March which can be found here;

the Insurance Companies Control Service (ICCS), which acting through its supervisor is responsible for oversight of insurers, reinsurers and insurance intermediaries;

the Cyprus Gaming and Casino Supervision Commission, responsible for oversight of casinos;

the National Betting Authority, responsible for sports betting and other equivalent activity oversight; and

the Unit for Combating Money Laundering (known as MOKAS, from the Greek Μονάδα Καταπολέμησης Αδικημάτων Συγκάλυψης), which is the financial intelligence unit for Cyprus.

Under the CBA advisory it is stressed that the regulator has adopted a number of measures and procedures with a view to reinforcing the level of commitment of its regulated members. Members have also been notified that Moneyval is expected to carry out site visits to regulated entities, including law firms and corporate service providers, in order to evaluate the overall understanding, implementation and effectiveness of the policies, procedures and measures currently in place for the enhancement of the regulatory framework for combating and preventing money laundering and terrorist financing.

Above all, the CBA urges its members to ensure full compliance with applicable legislation and CBA guidance, as well as to remain cognisant of the applicable CBA policies, measures and procedures.

The CBA emphasised the high importance of this assessment to the island itself, its economy and the legal profession as a whole.

A similar approach is to be expected from the other NCAs referred to above.

Steps required to be taken by firms

Now more than ever it will be crucially important for regulated firms and other “obliged entities” to ensure their compliance manuals and systems and controls are fully compliant with the national framework, comprising, where appropriate, compliance with the EU’s Fourth and Fifth Anti-Money Laundering Directive (4AMLD and 5AMLD).

Harneys is here to help and can assist with reviews and internal audits or any related question on the Cypriot AML and financial crime regime.

[1] For the avoidance of doubt, the Council of Europe (CoE) is not to be confused with the European Union. The CoE is the continent’s leading human rights organisation comprising 47 member states and hosts the European Court of Human Rights (ECHR).

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European Supervisory Authorities publish joint report on innovation hubs and regulatory sandboxes
Thu, 28 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/european-supervisory-authorities-publish-joint-report-on-innovation-hubs-and-regulatory-sandboxes/
http://www.harneys.com/insights/european-supervisory-authorities-publish-joint-report-on-innovation-hubs-and-regulatory-sandboxes/
The “FinTech: regulatory sandboxes and innovation hubs” (Joint Report) was published by the European Supervisory Authorities (ESAs) on 7 January 2019. The Joint Report is applicable to FinTech and InsurTech firms, notwithstanding the nature and size of the service provider, and calls for a pan-European framework addressing regulatory sandboxes and innovation hubs (innovation facilitators).

Comparative analysis and best practices

The Joint Report was prepared pursuant to the FinTech Action Plan of the European Commission (EC) and sets out a comparative analysis of the design of existing innovation facilitators while recommending best practices to further encourage the consistency in the operation of innovation facilitators at EU-level. The Joint Report further promotes regulatory and supervisory transparency and cooperation between national authorities.

ESAs set out key policy options intended to support competent authorities when considering the creation of, or reviewing the operation of, innovation facilitators while ensuring the innovator facilitators do not discriminate against a particular business model. The Joint Report notes that different approaches to the design and operation of innovation facilitators may affect the relative attractiveness of jurisdictions as centres for financial innovation.

The Joint Report recommends two policy options which focus in particular on the development of a Joint ESA “own initiative guidance” covering active guidance, close monitoring and cooperation between innovation facilitators at EU level and on the creation of an EU network of innovation facilitators to “bridge” innovation facilitators established in the EU.

Annex B of the Joint Report outlines several best practices for innovation facilitators relevant to conducting due diligence, creating defined entry criteria, objectives and access policies in order to ensure a high level of transparency in the entry process. Additionally, the Joint Report consolidates certain recommendations and challenges related to how innovation facilitators handle technical challenges and how to retain staff with appropriate knowledge and experience of FinTech, highlighting the pace of change in the financial sector.

Next steps

Competent authorities establishing or reviewing existing innovation facilitators are therefore expected to take into consideration the best practice principles outlined in the Joint Report. Additionally, the ESAs plan to further explore the options for improving cross-border cooperation at EU level and define additional steps in 2019.

If you have any questions, please contact Katerina Katsiami or your usual Harneys contact.

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Anguilla FSC enters into MoU with National Association of Insurance Commissioners in the US
Wed, 27 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/anguilla-fsc-enters-into-mou-with-national-association-of-insurance-commissioners-in-the-us/
http://www.harneys.com/insights/anguilla-fsc-enters-into-mou-with-national-association-of-insurance-commissioners-in-the-us/
The Anguilla Financial Services Commission (FSC) has entered into a Memorandum of Understanding (MoU) with the National Association of Insurance Commissioners (NAIC) which provides the basis on which the FSC and the NAIC will provide mutual assistance and exchange of information for the purpose of performing insurance regulatory functions.

Who is the NAIC?

The NAIC is comprised of the chief insurance regulators of the 50 US states, the District of Columbia and the five US territories; it sets industry standards and provides regulatory support on insurance related matters.

Purpose of the MOU

According to the objectives outlined in the MoU, the main purpose of the MoU is to “help insurance supervisors maintain efficient, fair, safe and stable insurance markets in Anguilla and the US for the benefit and protection of policy holders by providing a framework for cooperation [and exchange of information].”

Limitations of the MoU

The MoU expressly states that it does not directly or indirectly create any enforceable right nor does it supersede the laws of Anguilla or the US, rather the MoU is subject to the laws of the relevant jurisdictions.

Key elements of the MoU

Each authority is required to appoint a contact officer

Each party agrees to educate their staff on the regulations and insurance practices of the other jurisdiction

Contact officers or surrogates from the respective authorities must meet at least once a year

sharing of aggregated industry statistics and other non-confidential information; and

any other common interest.

Assistance may be denied on the grounds of public interest

Any request for assistance under the MoU must be in writing. In urgent cases, the request may be made orally but must be confirmed in writing within 10 days

Requests must be addressed to the authority's contact person indicated in Annex 1 of the MoU or their designated nomine

When deciding whether or not to honour a request, the relevant authority will take into account the following matters:

the laws and regulations of the country;

whether it is contrary to public interest for the authority or a member thereof, to give the assistance sought; and

the resources available to the authority for the purposes of dealing with the request.

While an authority will usually bear its own costs in relation to the provision of the mutual legal assistance under the MoU, the authority has the ability to request that the authority requesting assistance pay some or all of the costs where the costs are substantial

The conditions under the MoU may be waived or amended by the mutual agreement of each authority in writing; and

Each authority may terminate the agreement by giving 30 days’ notice.

If you have any questions, please contact Kimberly Seagojo or your usual Harneys contact.

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ESMA agrees Memoranda with UK regulators, reaction from CySEC
Tue, 26 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/esma-agrees-memoranda-with-uk-regulators-reaction-from-cysec/
http://www.harneys.com/insights/esma-agrees-memoranda-with-uk-regulators-reaction-from-cysec/
The ESMA memoranda of understanding seek to combat the risks of loss of delegation and recognition for UK financial markets firms in Europe post Brexit and are potentially a first step to dealing with the loss of passporting rights under EU single market directives.

Background

In an effort to avoid disorder in cross border financial business post-Brexit, on 1 February 2019, the European Securities and Markets Authority (ESMA) announced that it has negotiated and agreed Memoranda of Understanding (MoU) with the UK Financial Conduct Authority (FCA) and the Bank of England (BoE).

The signing of the MoUs is particularly important bearing in mind the significant changes that Brexit may cause to European financial markets. In the context of funds and asset management, pending any transitional arrangement Directive 2011/61/EU on Alternative Investment Funds Managers (the AIFMD) and Directive 2009/65/EC on Undertakings for Collective Investment in Transferable Securities (UCITS) will no longer apply in the UK post-Brexit. As a result, UK UCITS management companies and UK AIFMs will no longer benefit from the pan-European “passport” authorisation but will instead be treated as third-country AIFMs losing their ability to manage funds in the EU.

Allied to this, under Article 20 of the AIFMD, managers may only delegate portfolio management services to third countries (such as the UK post-Brexit) where cooperation agreements are in place between the supervisory authorities in the relevant EU member state and the third country in question.

Similar impacts will occur in other single market directive regimes from investment services and insurance through to banking, clearing and payment services.

ESMA-FCA MoU

The ESMA-FCA MoU includes:

provision between ESMA and the FCA for the exchange of information relating to the supervision of credit rating agencies (CRAs) and trade repositories (TRs) which will ensure investor protection, orderly markets and financial stability in the EU; and

provision for a multilateral MoU, between EU/EEA securities regulators and the FCA, covering supervisory cooperation, enforcement and information exchange between individual regulators and the FCA, enabling portfolio management services to continue to be carried out by UK based entities on behalf of counterparties based in the European Economic Area (EEA).

As relevant to the fund industry, the MoU with the FCA focusses on securing post-Brexit portfolio management delegation for UK asset managers. The MoU is expected to take effect in the event of a no-deal Brexit scenario to ensure the smooth continuity of portfolio management delegation and the cooperation and exchange of information between asset managers in the event the UK leaves the EU without a withdrawal agreement and implementation period. Andrew Bailey, Chief Executive of the FCA, confirmed that the MoUs will “minimise the potential for disruption, which is particularly important for the investment management sector, credit rating agencies and trade repositories”.

ESMA negotiated and agreed the MoU and the remaining 27 EU Member State regulators approved and signed it in order for it become fully effective in case of a no-deal Brexit scenario.

CySEC’s reaction on the ESMA-FCA MoU

In a press release published on 7 February 2019 the Cyprus Securities and Exchange Commission (CySEC) welcomed the agreement on the MoU reached with the FCA as a step to maintain investor protection and supervision as well as on other investment and fund management issues in the event of a no-deal Brexit scenario. Demetra Kalogerou, Chairwoman of CySEC acknowledged that: “This is of particular relevance for the delegation of collective portfolio management functions by Cypriot fund managers and self-managed funds to entities domiciled in the UK.”, as the existence of appropriate cooperation agreements between the respective competent authorities is, where applicable, a prerequisite under the EU Law, where such delegation takes place towards entities domiciled in a third country”.

ESMA-BoE MoU

On 4 February 2019, ESMA announced an agreement with the BoE for the recognition of Central Counterparties (CCPs) and the Central Securities Depository (CSD) established in the UK by ESMAunder the European Market Infrastructure Regulation (EU) No 648/2012 (EMIR) and Central Security Depositories Regulation (EU) No 909/2014 (CSDR) in the event of a no-deal Brexit.

Importantly the ESMA-BoE MoU provides that UK CCPs and the UK CSD will be eligible to continue servicing EU clearing members, trading venues and also providing notary and settlement services for securities issued under EU law. ESMA has stressed on a number of occasions leading to the signing of the MoU, the importance of dealing with financial stability risks faced by the EU following a no-deal Brexit, particularly in the area of central clearing. The MoU now highlights ESMA’s readiness to continue to recognise UK CCPs and CSDs whatever happens with Brexit.

By way of background the conclusion of the ESMA-BoE MoU satisfies the third recognition condition – establishment of cooperation arrangements – under both EMIR and the CSDR. More specifically, it is understood that the recognition requirements set out under Article 25 of EMIR, and Article 25 of the CSDR are respectively met in the ESMA-BoE MoU.

If you have any questions, please contact Aki Corsoni-Husain, Katerina Katsiami or your usual Harneys contact.

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Chambers Global - BVI Trends and Developments
Wed, 20 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/chambers-global-bvi-trends-and-developments/
http://www.harneys.com/insights/chambers-global-bvi-trends-and-developments/
Harneys contributed to the BVI Trends and Developments section in the Chambers Global Practice Guide Insolvency chapter. The section gives an overview of current trends and developments in local legal markets. Harneys Partners Andrew Thorp and Stuart Cullen analyse particular trends and provide a broader discussion of key developments in the jurisdiction. Download the section to read more.]]>
Cayman Islands regulator enters MoU with Chinese regulator
Mon, 18 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/cayman-islands-regulator-enters-mou-with-chinese-regulator/
http://www.harneys.com/insights/cayman-islands-regulator-enters-mou-with-chinese-regulator/
The China Securities Regulatory Commission (CSRC) and the Cayman Islands Monetary Authority (CIMA) (together the Competent Authorities) signed a memorandum of understanding (MoU), on 28 September and 5 November 2018 respectively, relating to the increased international activities in the securities, futures and other related investment products markets. The MoU is premised on the corresponding need for mutual cooperation between the Competent Authorities and cross-border enforcement with regard to Cayman Islands companies that conduct public securities offerings in China and / or whose securities are trading on China’s stock exchange. A copy of the MoU can be found here. This update sets out an overview of the MoU.

Principles

The following is a summary of the principles under the MoU:

The MoU serves as the basis of cooperation for the Competent Authorities and does not create any binding international legal obligations. It does not modify or override any laws or regulations in force in or applying to China or the Cayman Islands. The MoU does not create any rights enforceable by third parties, nor does it affect any arrangements under other MoUs.

The fulfilment of the provisions of the MoU will need to be consistent with the local laws of China and the Cayman Islands.

To the extent permitted under local laws in China and the Cayman Islands, each Competent Authority will make reasonable efforts to provide the other with any information relevant to a breach or potential breach of the regulatory requirements in the securities, futures and other investment products markets as supervised by the respective Competent Authority.

Scope

The scope of the MoU includes:

Ensuring issuers and offers of securities make full and fair disclosures.

Enforcement of laws and rules relating to issuing of, dealing in, arranging deals in, managing and advising on securities, futures and other investments.

Promoting and securing fitness and properness of brokers, dealers and advisers.

Supervising and monitoring the relevant regulated business activity to ensure compliance with laws and regulations.

Technical cooperation and assistance.

Other matters agreed upon by the Competent Authorities.

Requests and executions

The MoU prescribes the various procedural information that should be set out in a request for information (RFI). The RFI will need to be made in writing in English and addressed to the Director-General of the CSRC and the Deputy General Counsel of CIMA. In situations where there are urgent cases, RFIs can be made in summary form to be followed within 10 business days by a full request. The MoU does provide that the RFI will state a timeframe within which the requested party will need to comply. However, this is mitigated by an indication in the MoU that, regardless of the timeframe prescribed, the requested party should make best efforts to treat the RFI in a reasonable timeframe.

The requested party will need to examine and vet the RFI to ensure that it is complying with the terms of the MoU. Importantly, where the RFI cannot be accepted completely, the requested party can consider whether there may be any information that can be provided. This is very much discretionary. In determining whether to accept or decline a request, the requested party must consider whether:

the request relates to a breach of the laws or regulations which falls within the scope of the requested party;

broadly equivalent assistance would be available from the requesting party;

the request involves an assertion of a jurisdiction not recognised by the requested party;

it would be contrary to the public interests of the requested authority; and

a criminal proceeding has already been initiated in the country of the requested authority based on the same grounds and against the same person(s) or the same person(s) have been finally sanctioned on the same charges by the Competent Authority in the country of the requested party.

Confidentiality

The Competent Authorities will need to keep confidential to the extent permitted by law any RFI under the MoU, ie anti-tipping off will apply and such RFI should not be disclosed by the recipient to any third parties without the prior consent of the Competent Authority in the requesting party. To the extent any information obtained under the MoU is being disclosed to third parties, the requesting party will need to obtain an undertaking of keeping the information confidential from third parties, unless it is a legally enforceable demand to disclose.

If the Competent Authorities become aware that information passed under the MoU may be subject to a legally enforceable demand to disclose, it will, to the extent permitted by law, inform the other Competent Authority of the situation. The Competent Authorities will then discuss and determine the appropriate courses of action.

Technical cooperation

There is provision in the MoU for the Competent Authorities to work together to identify and address, subject to the availability of personnel and resources, the training and technical assistance required to facilitate the development of the regulatory framework for securities, futures and other related investment products in China and the Cayman Islands.

Consultation

The MoU has provisions built into it in relation to consultation between the Competent Authorities where there is a dispute in relation to the meaning of any terms used in the MoU. The Competent Authorities can also consult in relation to an RFI or a proposed RFI. The terms of the MoU can also be revised after consultation between the Competent Authorities in relation to any change in the law and regulation which can affect the operation of the MoU.

Important reminders

Following recent case law, the following points should be borne in mind when dealing with RFIs:

there is at common law a duty of procedural fairness to which public bodies like CIMA are subject, particularly when exercising functions with a power of compulsion;

procedural fairness requires that CIMA furnish any person to which an RFI relates with sufficient information to enable them to determine whether the RFI was lawfully issued (and therefore comply) or was unlawfully issued and therefore liable to challenge and susceptible to being quashed;

the duty of confidentiality to which persons (corporate or natural) are subject prevails over common law rights of procedural fairness; and

procedural fairness demands that an entity such as CIMA provide a sufficient level and degree of information to enable representations to be made as to lawfulness of the RFIs.

If you have any questions, please contact Mirza Manraj or your usual Harneys contact.

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Creation of INSTEX to facilitate legitimate trade between the EU and Iran
Wed, 13 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/creation-of-instex-to-facilitate-legitimate-trade-between-the-eu-and-iran/
http://www.harneys.com/insights/creation-of-instex-to-facilitate-legitimate-trade-between-the-eu-and-iran/
On 31 January 2019, France, Germany and the United Kingdom (the E3), following the commitment to preserve the Joint Comprehensive Plan of Action (JCPOA) which was endorsed through resolution 2231 (United Nations (UN)), announced the creation of the Instrument for Supporting Trade Exchanges (INSTEX), a special purpose vehicle designed with the intention of facilitating legitimate trade between the European Union and the Islamic Republic of Iran (Iran). A copy of the announcement is available here.

The key points in relation to the commitment are that:

Iran will have to fully implement its nuclear-related commitments, including full and timely cooperation within the International Atomic Energy Agency;

INSTEX will focus initially on the sectors that are considered to be the most essential to the Iranian population eg pharmaceuticals, medical devices and agriculture;

INSTEX’s long term objective is to be open to economic operators from third countries who may wish to do business with Iran, this is still being explored by the E3;

a phased approach will be adopted ie:

the E3 with INSTEX will continue to work on concrete and operational details to define the way INSTEX will operate; and

E3 will work with Iran to create an effective and transparent corresponding entity that is required to be able to operationalise INSTEX;

INSTEX will operate under high international standards in relation to anti-money laundering (AML) and countering terrorist financing (CTF) standards as well as applicable European Union (EU) and UN sanctions policies and procedures;

Iran is expected to quickly implement all elements of the plan of action set by the Financial Action Task Force, the information can be found here; and

the E3 underscored its commitment to pursue INSTEX with other interested EU countries.

The United Kingdom has indicated that the registration of INSTEX is a “big step” and there is still more work to be done. In the interim, the E3 are working closely to address all the technical and legal aspects required to make INSTEX operational, which will include working with Iran to establish necessary equivalent structures.

To recap, there remains no outright prohibition on entities and individuals in Anguilla, Bermuda, the British Virgin Islands or the Cayman Islands (together the Overseas Territories) dealing with Iranian persons (corporate or natural). In addition, EU nationals must consider their obligations under the EU’s so-called “Blocking Regulation” (for more on this see: Cypriot authorities issue advisory on Iran).

However, following the appropriate sanctions, domestic AML/CTF regimes and necessary safe-guards and procedures remains of the utmost importance and should be assessed on a risk sensitive basis.

If you have any questions, please contact Mirza Manraj or your usual Harneys contact.

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Down, but not out - so who picks up the tab?
Wed, 13 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/down-but-not-out-so-who-picks-up-the-tab/
http://www.harneys.com/insights/down-but-not-out-so-who-picks-up-the-tab/
In a landmark ruling for the Cayman Islands jurisdiction, the Honourable Chief Justice Smellie of the Grand Court, on 31 May 2018, emphatically dismissed a multi-billion dollar claim in the case of Ahmad Hamad Algosaibi & Brothers Company v SICL & Ors, involving allegations of fraud arising from one of the largest corporate collapses of the financial crisis. Download the PDF to read more. ]]>
The Cyprus Bar Association issues guidance on terrorist financing risk assessment
Tue, 12 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/the-cyprus-bar-association-issues-guidance-on-terrorist-financing-risk-assessment/
http://www.harneys.com/insights/the-cyprus-bar-association-issues-guidance-on-terrorist-financing-risk-assessment/
The Cyprus Bar Association (CBA) has issued guidance on identifying, assessing and understanding the risk of terrorist financing (TF) in financial centres (FCs), the contents of which have been reviewed and endorsed by MONEYVAL.

As part of the activities of the MONEYVAL Committee of Experts, representatives from a number of FCs, together with international TF experts, took part in a two-day workshop in Monaco in April 2018, addressing the challenges involved in identifying, assessing and understanding TF risks in FCs and the best practices to combat such risks (the workshop). The CBA published the conclusions of this workshop in the form of official guidance and urged regulated members to consider and implement its contents in their TF risk assessment procedures.

The CBA emphasised that the process of identifying, assessing and understanding the risk of collection, movement and use of funds for TF purposes should primarily involve an evaluation of demographic and geographical factors of the FC in question. The focal point of the assessment however must be the examination of the potential of TF exposure through:

service provision from businesses in the FCs to parties supporting foreign terrorism;

abuse of philanthropy; or

the use of funds generated by illicit activities to finance terrorism.

Assessment of threat

The CBA highlighted the need for consideration of the crossover between threat and vulnerability when assessing TF risks.

In determining the underlying threat, regulated members are encouraged to observe the extent of any connection between the FC and jurisdictions which present a higher risk of terrorism or have strong links with such countries (focus jurisdictions). Regulated members are urged to take into account the following categories of information, amongst other, as relevant to this consideration:

data on flows to and from the FC by jurisdiction;

the extent to which beneficial owners (BOs), relatives of BOs, people exercising control over legal persons or legal arrangements, people with links to such legal persons or legal arrangements are from focus or high risk jurisdictions or link with such jurisdictions;

the extent to which assets held by and activities undertaken by legal persons and legal arrangements are located in focus jurisdictions or linked to such jurisdictions;

the extent to which business relationships and one-off transactions are carried out with parties who are in or are linked to focus jurisdictions; and

the extent to which the FC is used by foreign politically exposed persons.

In determining the levels of TF threat, regulated members are further urged to have regard to the extent to which TF is occurring in jurisdictions with which the FC has close geographical and/ or political links, through:

internet research;

reviews of the evaluation reports and risk assessments of such jurisdictions; or

meetings with relevant authorities.

Assessment of vulnerability

Regulated members are also prompted to examine the extent to which the relevant services or products are likely to be appealing for TF purposes, through observing external sources of information, for instance:

information of TF patterns provided at authoritative events such as MONEYVAL presentations; or

evaluation reports and risk assessments of jurisdictions dealing with similar services, products or customer profiles.

The vulnerability assessment should further consist of an evaluation of the measures in place to address TF in the FC and in particular, members are asked to consider a variety of factors including but not limited to:

any gaps in the preventive legal framework;

the extent to which the authorities have a good understanding of TF;

whether there is sufficient skill to investigate TF and supervise compliance with TF requirements;

whether the operation of formalised arrangements with other jurisdictions is effective; and

the findings of competent authorities in respect of implementation of international sanctions.

Collective movement

The conclusions of the workshop have been issued in the form of guidance for participating jurisdictions to refer to, which is to be made widely available in order to assist other jurisdictions facing similar challenges in furtherance to the global movement against TF.

It is clearly of paramount importance for law firms to establish robust risk assessment procedures and compliance policies in order to mitigate any significant TF risks which firms are directly exposed to on an everyday basis.

Harneys has significant experience in advising and assisting firms in Cyprus and elsewhere with establishing suitable compliance infrastructure for the operational needs of businesses. If you have any questions, please contact Marina Stavrou or your usual Harneys contact.

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Clearstream expands fund platform to Cyprus
Fri, 08 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/clearstream-expands-fund-platform-to-cyprus/
http://www.harneys.com/insights/clearstream-expands-fund-platform-to-cyprus/
On 7 January 2019, Clearstream, one of the most well-known Luxembourg based international central securities depository (ICSD), announced a further expansion of its Vestima offering by making Cyprus domiciled investment funds, including alternative investment funds (AIFs) and collective investment in transferrable securities (UCITS), eligible for order routing, settlement and custody. According to Bernard Tancre, head of investment fund services at Clearstream, "adding Cyprus funds to Vestima shows not only the demand from our clients, but also our confidence in Cyprus as an emerging funds domicile."

Further to the announcement, international customers may now use their Vestima setup for the purposes of direct access to Cyprus domiciled funds and benefit from the same streamlined handling as for other markets.

The announcement highlighted the notable development witnessed in the Cyprus fund market outlining the impressive increase of assets under management from €2.1 billion in 2012 to €4.8 billion in 2018. Remarkably, Cyprus is fast becoming one of the optimal emerging fund centres in Europe and the continuous efforts and initiatives taken by international leading service providers in this field, like Clearstream, combined with the low operating costs, effective tax system and simple legal system based on English common law contribute significantly to this increased and promising development.

Vestima: a single platform for fund processing

Essentially, Vestima is a single platform developed to simplify all aspects of investment funds trading. It assembles Clearstream’s entire set of investment fund services providing order routing, execution and management service from Clearstream Banking as well as settlement and asset servicing for alternative and mutual funds. It is available for Clearstream’s ICSD customers as well as Vestima’s central securities depository in Germany and Luxembourg. It is also broadly known as the “one stop shop for funds”.

Vestima Services

All types of funds from mutual to alternative are covered in Vestima. Vestima provides consolidated services to investors across all investment fund classes.

Account operator: a service holding the respective positions in the fund register in the name of the customer or its nominee with Clearstream as attorney of the customer or the registered nominee for the performance of certain Vestima services;

VestimaPRIDE data: this service provides maintenance services to the hedge fund portfolio of investors and fund distributors (including but not limited to reference data and pricing to customised reporting);

Investment funds as collateral: an automated service which leverages investment funds to secure collateralised transactions;

Vestima-transfer services: a service handling the transfer of investment funds to and from Clearstream via the register of the transfer agent;

Published fund list: a service designed to enable customers to overcome the challenges of changing fund data and to improve the operational efficiency of the placement of fund orders.

For more on Clearstream’s acceptance of Cypriot funds please see here.

If you have any questions, please contact Katerina Katsiami or your usual Harneys contact.

The Circular aims to remind Regulated Entities that the Guidelines are applicable from 3 January 2017 and the purpose of the Guidelines is to specify the criteria for the assessment of:

debt instruments incorporating a structure which makes it difficult for the client to understand the risk involved; and

structured deposits incorporating a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term.

Further, they clarify the concept of “embedded derivatives” in order to provide an overall framework for the application of Article 25(4) (a) of MiFID II in relation to debt instruments.

Guidelines’ purpose

ESMA expect the Guidelines to strengthen investor protection and to promote greater convergence in the classification of “complex” or “non-complex” financial instruments or structured deposits for the purposes of the appropriateness test/execution-only business in accordance with Article 25(3) and 25(4) of MiFID II.

Within the Guidelines, ESMA provides a non-exhaustive list of examples of debt instruments that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved and complex structured deposits for the purpose of Article 25(4)(a)(ii), (iii) and (v) of MiFID II.

If you have any questions, please contact Katerina Katsiami or your usual Harneys contact.

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Cayman’s laws well equipped for maturing digital asset market
Wed, 06 Feb 2019 00:00:00 +0000
http://www.harneys.com/insights/cayman-s-laws-well-equipped-for-maturing-digital-asset-market/
http://www.harneys.com/insights/cayman-s-laws-well-equipped-for-maturing-digital-asset-market/
The cryptocurrency market is predicted to reach US$1 trillion according to Smartereumas the market capitalisation continues to grow. Currently, the estimated size of the crypto market is approximately US$417 billion, a very modest number and one that remains dwarfed by other traditional and alternative asset classes. To put things into context, global private equity alone raised more than US$453 billion in 2017. Download the PDF to read more.]]>
Publication of the Sixth Anti-Money Laundering Directive
Thu, 31 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/publication-of-the-sixth-anti-money-laundering-directive/
http://www.harneys.com/insights/publication-of-the-sixth-anti-money-laundering-directive/
The EU published the Sixth Anti Money Laundering Directive (6AMLD) on 12 November 2018 in its Official Journal (OJ), adding to the criminal law-related provisions of the Fifth Anti Money Laundering Directive (5AMLD) as adopted by EU member states in May 2018. Amongst other provisions, a maximum term of imprisonment of four years for individuals has been introduced, in addition to further financial-oriented measures that could be imposed, such as fines and exclusion from access to public funding for legal persons.

The purpose of strengthening the provisions of the 5AMLD is to further enhance the current financial crime regime by adopting further drastic commercial-oriented measures, for instance permanent bans from commercial activities and closure of the establishment involved in committing the relevant criminal offence. The 6AMLD emphasises that the money laundering activity does not merely involve simple possession or use of ill-gotten gains, but expands the definition to include the transfer, concealment, conversion, or disguise of the criminal proceeds, therefore amounting to further circulation of the same. By the end of 2020, a conviction for a money laundering offence will be possible even in the event that the criminal activity which generated the criminal proceeds cannot be identified, which poses an incredibly high risk for legal and financial service providers who frequently process large payments in the course of their business.

EU member states must transpose the provisions of the 6AMLD by 3 December 2020, on which the same comes into force, and inform the Commission as to the relevant steps taken to do so. The link to the relevant directive in the OJ can be found here.

If you have any questions, please contact Marina Stavrou or your usual Harneys contact.

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New BVI Shipping Act increases attractiveness of VISR
Tue, 29 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/new-bvi-shipping-act-increases-attractiveness-of-visr/
http://www.harneys.com/insights/new-bvi-shipping-act-increases-attractiveness-of-visr/
The Government of the Virgin Islands has introduced new measures to support the continuing growth of the Virgin Islands Shipping Registry (VISR).

The Merchant Shipping (Amendment) Act, 2018 (the Act) came into force on 19 January 2019 and changes the qualifying criteria for ships that may be registered by VISR.

VISR is only capable of registering ships owned by certain categories of persons, as set out in the Merchant Shipping Act, 2001 (Qualifying Persons). The Act expands the categories of Qualifying Persons to include the following:

Persons who are nationals of a Member State of the Caribbean Community or the Organisation of Eastern Caribbean States; and

Persons who are citizens, bodies corporate or foreign companies incorporated, established or registered in a recognised jurisdiction or any overseas country, territory or dependency of such a recognised jurisdiction.

A recognised jurisdiction is one which is included in Schedule 2 to the Anti-Money Laundering and Terrorist Financing Code of Practice, 2008.

Prior to the introduction of the Act, a company incorporated in a Member State of the Caribbean Community or the Organisation of Eastern Caribbean States had to be registered as a foreign company in the BVI under Part X of the BVI Business Companies Act, to be a Qualifying Person. There are administrative and cost implications associated with registration as a foreign company in the BVI but with the Act coming into force, the requirement for such companies to be so registered has been removed.

The Government has acknowledged that the registration of ships under construction is an issue that needs to be addressed and the Act provisions for the introduction of future regulations to govern the registration of such ships by VISR. We expect these regulations to be enacted shortly and interested parties should pay attention to legislative developments in this area.

Prior to the Act coming into force, VISR was only able to register bareboat charter ships of 1500 gross tonnage and above. Following the introduction of the Act, and provided that all other statutory requirements are met, any bareboat charter ship, regardless of its gross tonnage is able to be registered.

By extending the scope of VISR’s authority and services and by making provision for those services to be provided in a manner that is more accessible to clients, it is expected that the Act will contribute to the continuing growth of ship registration business in the BVI.

If you have questions please contact Johann Henry or your usual Harneys contact.

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Chemical Weapons Sanctions for Overseas Territories Order 2018
Tue, 29 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/chemical-weapons-sanctions-for-overseas-territories-order-2018/
http://www.harneys.com/insights/chemical-weapons-sanctions-for-overseas-territories-order-2018/
The Chemical Weapons (Sanctions) (Overseas Territories) Order 2018 (the OT Order) was made on 12 December 2018 and came into force on 9 January 2019. The OT Order is directly relevant to, and applies in Anguilla, the British Virgin Islands and the Cayman Islands.

The OT Order gives effect to the sanctions regime created by the European Union:

The promulgation of the OT Order was as a result of the decision taken by the European Union ambassadors on 16 January to impose sanctions on persons for carrying out alleged chemical attacks using a nerve agent known as Novichok, in the United Kingdom, in 2018.

The sanctions imposed under the OT Order include an asset-freeze mechanism on persons who are designated by the Council of the European Union (CEU) as persons who are responsible for, involved in, or promote the proliferation and use of chemical weapons, as well as persons associated with such persons. At present, no names are listed in Annex 1 to the Council Decision or the Council Regulation but this is being kept under constant review.

conduct due diligence checks to determine if any person who they act for is designated by the CEU;

any results should be documented to the know-your-client files; and

to the extent there is a positive hit then legal advice should be taken.

Note for Bermuda: Bermuda is not expressly included within the OT Order. However, UK-Bermudian constitutional arrangements require that Bermuda implement the OT Order domestically instead. The Bermuda implementing order, published in their Gazette on 21 December 2018 can be found here.

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Cypriot authorities issue advisory on Iran
Fri, 18 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/cypriot-authorities-issue-advisory-on-iran/
http://www.harneys.com/insights/cypriot-authorities-issue-advisory-on-iran/
Various key Cypriot competent authorities issued, in November 2018, advisories relating to the reimposition of certain US sanctions on Iran and pronouncements by FinCEN as well as a recap on the current state-of-play in the EU on doing business in Iran, including reminders on the so-called EU-Blocking Regulation.

The Institute of Certified Public Accountants of Cyprus (ICPAC), the Cyprus Securities and Exchange Commission (CySEC) and the Ministry of Foreign Affairs (MoFA) have all issued advisories noting the publication of official guidance issued by United States (US) authorities, specifically the Financial Crimes Enforcement Network (FinCEN), in respect of re-imposition of US sanctions against Iranian individuals, companies and enterprises on 5 November 2018.

The advisories issued by ICPAC, CySEC and MoFA (the Cypriot competent authorities or CCA) urge regulated and obliged entities such as accountancy firms and financial services providers to consider the contents of the FinCEN advisory relating to Iran, in light of the risks of money laundering and the financing of terrorism that the international financial system could potentially be faced with due to malign activity in Iran.

On the face of it, and as relevant to non-US institutions, the FinCEN advisory aims to “help foreign financial institutions better understand the obligations of their US correspondents, avoid exposure to US sanctions, and address the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) risks that Iranian activity poses to the international financial system”. A copy of the FinCEN advisory is here.

In turn the CCA advisories urge members, in summary, to:

ensure that all necessary due diligence policies and procedures are in place and the appropriate actions are being taken;

observe any sanctions-related lists published by various organisations and other agencies such as the United Nations and the European Union (EU), as well as updates by the Financial Action Task Force relating to high-risk countries;

remain alert to any publications of sanctions relating to high-risk individuals.

EU Blocking Regulation

Of course, Cyprus is not under US jurisdiction and is instead a full Member State of the EU. It therefore implements the entire body of EU law on sanctions and restrictive measures, US sanctions law is of practical – but not legal – relevance.

As relevant to the reintroduction of US sanctions on Iran, and the consequent exit of the US from the Joint Comprehensive Plan of Action (JCPOA), the EU amended its so-called Blocking Regulation in an attempt to nullify the new US sanctions and preserve the tenets of the JCPOA. As such the EU Blocking Regulation[1] operates to forbid EU persons from complying with extra-territorial US sanctions against Iran.

The CCAs have acknowledged in their advisories and elsewhere that while US and other international developments on sanctions and AML matters must of course be taken into account by institutions, so too must the requirements of EU law, including those under the EU Blocking Regulation.

Food for thought

The CCA advisories acts as a reminder of the importance of US sanctions (and their potential extra-territorial reach) as well as new pronouncements of the US authorities on financial crime emanating from Iran. At the same time they bear witness, in the case of commentaries on the EU Blocking Regulation, to the divergence – indeed conflict – between the treatment of the two blocs as regards the Obama-era JCPOA.

It is clearly of paramount importance that firms offering services to clients who are connected with or operating in Iran and other jurisdictions which are subject to sanctions, establish robust compliance policies and procedures in order to mitigate any significant risks which firms and their staff may be otherwise exposed to.

[1] Commission Delegated Regulation (EU) 2018/1100 of 7 August 2018, which expands the scope of Regulation (EC) No 2271/96 to block the perceived extraterritorial effects of US-Iran sanctions. This Regulations operates alongside Commission Implementing Regulation (EU) 2018/1101 which enables EU persons to seek authorisation to comply with US sanctions in certain circumstances and guidance notes which aim to clarify certain aspects of the revised EU-Iran sanctions regime.

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Protocol amending the Convention for the Elimination of Double Taxation between Cyprus and the United Kingdom
Thu, 17 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/protocol-amending-the-convention-for-the-elimination-of-double-taxation-between-cyprus-and-the-united-kingdom/
http://www.harneys.com/insights/protocol-amending-the-convention-for-the-elimination-of-double-taxation-between-cyprus-and-the-united-kingdom/
On 19 December 2018, the Cypriot Minister of Finance, Harris Georgiades; and the British High Commissioner to Cyprus, Stephen Lillie, signed a protocol amending the Convention for the Elimination of Double Taxation between Cyprus and the United Kingdom (the Protocol), with respect to taxes on income, capital gains, and the prevention of tax evasion and avoidance.

The Protocol introduces a grandfathering period for the calendar years ending on or before 31 December 2024 so that persons whose pension was subject to tax in Cyprus under the provisions of Article 19(1) of the Convention of 1974, may elect to be taxed under that Convention and exempt from the provisions of Article 18(2) of the 2018 Convention.

This latest amendment of the Protocol created a framework that facilitates economic cooperation, fiscal stability and transparency in the relations of the two countries.

If you have questions on the Protocol and how it will apply to you please contact Emily Yiolitis, Marisa Efstathiou or your usual Harneys contact.

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National Risk Assessment of Money Laundering and Terrorist Financing Risks in Cyprus
Wed, 16 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/national-risk-assessment-of-money-laundering-and-terrorist-financing-risks-in-cyprus/
http://www.harneys.com/insights/national-risk-assessment-of-money-laundering-and-terrorist-financing-risks-in-cyprus/
The Advisory Authority against Money Laundering and Terrorist Financing (the Advisory Authority) has reported on the first National Risk Assessment (NRA) of Money Laundering and Terrorist Financing Risks which has effectively been carried out in Cyprus as required under the provisions of the Fourth Anti Money Laundering Directive (4AMLD).

The Advisory Authority issued its report on Cyprus’ first NRA on 13 November 2018. The NRA was headed by the Central Bank of Cyprus (CBC) and the Financial Intelligence Unit (FIU), and was carried out and effectively completed as of the end of 2017. The NRA conducted by the Cypriot authorities was carried out in compliance with the provisions of the 4AMLD and the Recommendations of the Financial Action Task Force (FATF), the key findings of which have been published in a NRA Report (the Report). A copy of the report can be found here.

The Report examines the level of risk in respect of various aspects of the system and identifies certain measures adopted between the years 2012 to 2017 which are considered to be risk mitigating, such as:

compliance with FATF Recommendations in respect of an enhanced Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) legislation with regards to the powers of the FIU and other regulators;

comprehensive criminalisation of Money Laundering (ML) as an offence within the Republic and adequate asset recovery laws in place;

effective functioning of the FIU and adequate capacity to deal with ML intelligence analysis, including dealing with significant numbers of suspicious transaction reports and close cooperation with other supervisory authorities and law enforcement agencies; and

access to beneficial ownership information and bank account data.

The Report further outlines a number of risk mitigating factors which are currently in the process of being implemented, as of the beginning of 2018. Responsible for overseeing such implementation is the Advisory Authority which consists of the competent supervisory authorities, the FIU, relevant Government Ministries or Departments and the private sector, all of which form the advisory body to the Council of Ministers of the Republic.

Such risk mitigating actions include:

reinforcement of training of investigators, prosecutors and judiciary in respect of ML and terrorist financing offences, as well as confiscation proceedings;

upgrade of internal controls in the administrative services sector and enhancement of frequency of assessments by the supervisory authorities;

issuance of directives to banks specifically dealing with preventive measures against ML and terrorist financing; and

augmentation of the resources of competent supervisory authorities and the FIU.

The NRA serves as a functional guide for regulated entities and supervisory authorities involved in enhancing measures minimising ML risks to the Republic. AML and CTF legislation appears to be of more relevance than ever before for professionals of various backgrounds, as well as government bodies and supervisory authorities.

Harneys advises many of the world’s top institutions on AML and CFT legislation in the jurisdictions we cover, including Cyprus. It is now of paramount importance that firms operating in jurisdictions subject to such legislation be in the forefront of change and establish robust compliance policies in order to mitigate the significant risks which firms and their staff may be otherwise exposed to.

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Project finance structuring with an offshore element; protecting your project company and shifting risks
Wed, 16 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/project-finance-structuring-with-an-offshore-element-protecting-your-project-company-and-shifting-risks/
http://www.harneys.com/insights/project-finance-structuring-with-an-offshore-element-protecting-your-project-company-and-shifting-risks/
In this article, originally published by LexLatin, Nicole Pineda and Ana Lazgare address why Cayman Islands SPVs are the issuing vehicle of choice for project bonds funding large infrastructure projects (including greenfield projects) with a long economic life. This comes at a time of such great need for Foreign Direct Investment into Peru. This article is published in Spanish, download the PDF to read more.]]>
Cyprus: Tax treatment of non-returnable capital contributions
Tue, 15 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/cyprus-tax-treatment-of-non-returnable-capital-contributions/
http://www.harneys.com/insights/cyprus-tax-treatment-of-non-returnable-capital-contributions/
The Cyprus Tax Department has recently published an informative circular (the Circular), which explains the tax treatment of non-returnable capital contributions by Cyprus taxpayers to companies that are non-Cyprus tax resident.

The Circular confirms that Article 33 of the Income Tax Law N.118(I)/2002 (as amended) (the Law) will not apply to debit or credit balances generated by non-returnable capital contributions to non-Cyprus tax resident companies, provided that a number of conditions are satisfied with full documentary evidence.

The conditions to be satisfied are as follows:

The person making the contribution does not have a lawful right to request the return of the amount paid for the non-returnable capital contribution, at any time.

The repayment of the non-returnable capital contribution is only valid through the reduction of capital or through the dissolution/liquidation of the company. This requirement shall not apply in cases where the laws in the jurisdiction of the receiving company do not require the reduction of the capital for the return of the capital, provided that the taxpayer gathers the relevant documentary evidence.

The repayment of the non-returnable capital contribution does not take place earlier than two years from the end of the tax year in which the capital contribution was made.

The contributor has a direct interest in the recipient's capital.

The recipient is not entitled to tax relief in the relevant jurisdiction for deemed costs arising as a consequence of non-returnable capital contributions.

Where all of the above conditions are satisfied, the amount contributed as a non-returnable capital contribution shall be deemed as part of the assets of the company which shall not be eligible for relief under Article 9 and 11 of the Law and therefore, the non-returnable capital contribution shall be construed with regards to these provisions.

The Tax Department also pointed out that the deductible expenses in relation to the financing of the non-returnable capital contributions shall not be allowed.

The Circular applies to all non-returnable capital contributions in non-Cyprus tax resident companies which were incorporated from 1 January 2017 onwards and supersedes any existing tax rulings on this matter.

If you have questions on the Circular and how it will apply to you or to your business please contact Emily Yiolitis, Marisa Efstathiou or your usual Harneys contact.

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Do UK Territories need beneficial ownership info registers?
Mon, 14 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/do-uk-territories-need-beneficial-ownership-info-registers/
http://www.harneys.com/insights/do-uk-territories-need-beneficial-ownership-info-registers/
Within its 65 sections, the Sanctions and Anti-Money Laundering Act covers two subjects: All but three sections provide for a framework of sanctions implementation in the UK following Brexit. The remaining three sections, precisely sections 49 to 51, deal with discrete anti-money laundering issues, most controversially including the proposed introduction of publicly accessible registers of beneficial ownership information on companies in the UK overseas territories. In this article, published by Law 360, Aki Corsoni-Husain addresses why the UK has Legislated for the UK overseas territories, what the requirements will be, and what will happen next.]]>
Economic substance – BVI law in force
Fri, 11 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/economic-substance-bvi-law-in-force/
http://www.harneys.com/insights/economic-substance-bvi-law-in-force/
The British Virgin Islands (BVI) has passed legislation requiring certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the BVI. The Act also introduces extended reporting obligations. Any company or limited partnership registered or incorporated in the BVI should be aware of this legislation and consider how it may be affected.

The Economic Substance (Companies and Limited Partnerships) Act, 2018 (the Act) came into force on 1 January 2019. It addresses the concerns of the EU Code of Conduct Group for Business Taxation and recent OECD guidance around the economic substance of entities in jurisdictions with low or (like the BVI) zero corporation tax. The Act demonstrates the BVI’s continued commitment to international best practice including the BVI’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives.

The Act follows closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories including the Cayman Islands and Bermuda.

Further key details, in the form of Regulations, Rules and formal Guidance Notes, are expected to be published during the course of the first quarter.

Which entities need to demonstrate economic substance in the BVI?

The Act imposes economic substance requirements on relevant legal entities, other than non-resident entities[1], which carry on a relevant activity. The requirements potentially apply to any BVI company or BVI limited partnership as well as any foreign company or limited partnership which is registered in the BVI as a foreign entity[2]. Entities which do not carry on a relevant activity are not subject to the economic substance requirements but may be subject to certain reporting obligations (see “What are the reporting obligations and who will have access to information?” below).

The relevant activities are:

Banking business

Insurance business

Shipping business

Fund management business

Finance and leasing business

Headquarters business

Holding business

Intellectual property business

Distribution and service centre business

Under the Act, economic substance will be measured by reference to reporting periods which are not longer than one year, recognising that compliance can only be evaluated over a period of time. Companies and limited partnerships which are incorporated or formed from 1 January 2019 (New Entities) and which need to demonstrate economic substance will have to comply for any reporting period ending on or after 31 December 2019. New Entities must elect to have a first financial period of not more than one year from the date of incorporation or formation, as applicable. Companies and limited partnerships in existence on 1 January 2019 and which need to demonstrate economic substance will have to comply for each reporting period starting no later than 30 June 2019.[3]

Certain rebuttable presumptions of non-compliance will apply to entities carrying on intellectual property business that are classified as a “high risk IP legal entity” or which do not carry on research and development or marketing, branding and distribution activities in the BVI, as appropriate to the type of intellectual property involved. Entities carrying on intellectual property business are encouraged to seek legal advice.

What will relevant entities that carry on relevant activities need to do?

An analysis will need to be carried out to assess whether a relevant entity is conducting any relevant activity. Any affected entities then need to consider their position and take appropriate action.

Entities which are subject to the economic substance requirements (other than pure equity holding entities, as described below) must manage and direct the relevant activity in the BVI and conduct core income-generating activity. They must also, taking into account the nature and scale of the relevant activity, show that they have an adequate level of employees and expenditure in the BVI and appropriate physical offices or premises for the core income generating activity. It should be noted that outsourcing of the income generating activity is permitted in certain circumstances.

A different test applies to a pure equity holding entity, which carries on no relevant activity other than holding equity participations in other entities and earning dividends and capital gains. Under this test, the relevant entity will be deemed to have adequate substance if it complies with its statutory obligations under the BVI companies / limited partnership laws and has adequate employees and premises for holding and, where relevant, managing those equity interests.

Harneys Fiduciary is able to provide various services to assist relevant entities with meeting their substance requirements.

What are the reporting obligations and who will have access to information?

The Act made changes to the BVI Beneficial Ownership Secure Search (BOSS) System regime, as a result of which BVI and foreign registered companies and limited partnerships will generally be required to report certain information to their BVI registered agent to be uploaded onto the BOSS system. Previously “exempt persons” (including mutual funds) will remain exempt from the BOSS reporting requirements unless they carry on a relevant activity.[4]

Broadly, in addition to their existing obligations under the BOSS regime, BVI and foreign registered companies and limited partnerships which are subject to the BOSS reporting requirements will have to identify and provide their registered agent with certain information.

This information will be provided to the BVI International Tax Authority (ITA) via the BOSS system. The ITA may use the information to discharge its duty to supervise and enforce the economic substance requirements. Information will be disclosed by the ITA to relevant overseas authorities in certain appropriate cases, including where there is breach of the economic substance requirements or where the entity claims to be tax resident in an EU member state.

Substantial fines and up to 5 years’ imprisonment can be imposed for non-compliance and the relevant entity may be struck off the register.

What happens next?

The Regulations, Rules and formal Guidance Notes, when issued, will provide further detail and a clearer picture. We will be in touch with more information on the steps required to understand the impact (if any) of the economic substance requirements and the measures that entities need to take to ensure compliance. We believe that, for many entities, the impact will be minimal and compliance will be straightforward. If you have any questions in the meantime, please contact your usual Harneys contact or Ross Munro, Phil Graham, Rachel Graham, Amy Roost or Josh Mangeot.

[1] Tax resident in a jurisdiction outside the BVI (which is not itself treated by the EU as non-cooperative for tax purposes).

[3] It is possible to apply to the BVI International Tax Authority (ITA) to shorten or lengthen a financial period so as to alter the commencement date for successive financial periods, provided that no such altered period shall exceed twelve months in length. Please consult with your usual Harneys contact for further information.

[4] It is possible that exempt persons not carrying on a relevant activity may be required to submit a “nil return” confirming this to their registered agent at the end of each financial period.

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Economic substance – Cayman Islands laws in force
Fri, 11 Jan 2019 00:00:00 +0000
http://www.harneys.com/insights/economic-substance-cayman-islands-laws-in-force/
http://www.harneys.com/insights/economic-substance-cayman-islands-laws-in-force/
The Cayman Islands has passed legislation requiring certain legal entities carrying on relevant activities to demonstrate adequate economic substance in the Cayman Islands. Any company, LLC[1] or LLP[2] registered or incorporated in the Cayman Islands should be aware of this legislation and consider how it may be affected.

The new Laws[3] came into force on 1 January 2019 to address the concerns of the EU Code of Conduct Group and recent OECD guidance on the economic substance of certain entities in jurisdictions with low or (like the Cayman Islands) zero corporation tax. The Laws demonstrate the continued commitment of the Cayman Islands to international best practice, including Cayman’s implementation of the OECD’s Base Erosion and Profit Shifting (BEPS) framework and related EU initiatives.

The Laws follow closely the approach taken to address the same issue by the Crown Dependencies of the UK (Jersey, Guernsey and the Isle of Man) and the other UK Overseas Territories including the British Virgin Islands and Bermuda.

Further detail, in the form of principles based guidance notes, is expected to be finalised over the next few weeks with sector specific guidance being developed during 2019, and we will provide further updates when guidance is approved and available from the Cayman Islands Tax Information Authority (TIA).

Relevant entities that existed before 1 January 2019 and that are conducting relevant activities on that date must comply with the economic substance requirements from 1 July 2019. Relevant entities that are established from 1 January 2019 onwards will have to comply with the requirements from the date they commence the relevant activity.

Which entities need to demonstrate economic substance in the Cayman Islands?

The Laws impose certain economic substance requirements on Cayman Islands relevant entities which carry on a relevant activity. Any Cayman Islands company, LLC or LLP and any foreign company which is registered in the Cayman Islands as a foreign company may be a relevant entity, in each case unless their business is centrally managed and controlled outside the Cayman Islands and the entity is tax resident outside of the Cayman Islands [4].

The relevant activities are:

Banking business

Distribution and service centre business

Financing and leasing business

Fund management business

Headquarters business

Holding company business

Insurance business

Intellectual property business

Shipping business

What will relevant entities that conduct relevant activities need to do?

Relevant entities that are conducting relevant activities will need to make an assessment regarding their activities and may be required to put in place measures to allow them to comply with the requirements of the Laws regarding economic substance in the Cayman Islands for each relevant activity they conduct. It is possible for relevant entities to outsource certain functions to other service providers in the Cayman Islands.

What are the reporting obligations and who will have access to information?

From 2020, all relevant entities must include a declaration in their annual return as to whether or not they are conducting a relevant activity and what their financial year is. Relevant entities that are conducting relevant activities and which must demonstrate economic substance will need to make annual filings with the TIA from 2020 on a portal which is currently being developed.

Information about entities in breach of the economic substance requirements will be disclosed by the TIA to tax authorities in the jurisdiction where the parent / beneficial owner resides and the tax authority of the country of incorporation of the relevant entity, if the relevant entity is incorporated outside the Cayman Islands.

Penalties will be imposed for non-compliant entities.

What happens next?

The guidance notes, when issued, will provide further detail and a clearer picture. We will be in touch with more information on the steps required to understand the impact (if any) of the economic substance requirements and the measures that entities need to take to ensure compliance. If you have any questions in the meantime, please contact your usual Harneys contact or Matthew Taber or Amy Roost.

[1] Limited liability company registered under the Limited Liability Companies Law

[4] The economic substance requirements will not apply to domestic Cayman Island companies which are not part of an MNE Group which carry on business in the Cayman Islands under local licensing laws or companies limited by guarantee or not for profit associations

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Corporate receivership applications – Fighting back
Fri, 14 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/corporate-receivership-applications-fighting-back/
http://www.harneys.com/insights/corporate-receivership-applications-fighting-back/
This article, published by IFLR, discusses the role of receivership applications within the Cayman Court. Paul Smith and Katie Pearson deliberate the alternative ways receivers can be appointed, including prior to judgement and by way of equitable execution. The article draws upon several cases from the Cayman Islands courts, including the 2011 case of TMSF v Merrill Lynch Bank and Trust Company (Cayman) Ltd. Download the PDF to read more.]]>
The British Virgin Islands in digital movement: Peer-to-peer lending introduced
Thu, 13 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/the-british-virgin-islands-in-digital-movement-peer-to-peer-lending-introduced/
http://www.harneys.com/insights/the-british-virgin-islands-in-digital-movement-peer-to-peer-lending-introduced/
Since the rushing air of financial technology hit the shores of the British Virgin Islands (the BVI) over the last few years, many BVI based service providers have been busy servicing this new and exciting area of business. The growth of FinTech is perhaps unavoidable as the world continues to digitize and electronic transactions continue to prove more beneficial to consumers, in terms of cost and effectiveness. As a result, the interest venture capitalists have taken in this burgeoning industry is undeniable and offshore jurisdictions like the BVI continue to take electronic steps in order to keep pace with the demands of the new kids on the blockchain.

The BVI Financial Services Commission, the central regulator (the Commission), is also keenly watching this space and it continues to encourage innovation in the BVI by recognising this evolution. In October 2018, amendments to the Financing and Money Services (Amendment) Act 2018 were gazetted which are expected to come into force shortly in the BVI (the Amendment Act). Once in force, the Amendment Act will introduce a range of new provisions which are noteworthy. In particular, the new provisions will introduce a new regime and a new category of licence for peer-to-peer lending which we will discuss further below.

First, however, we examine some of the more administrative, ‘house-keeping’, changes to the legislation.

Expansion of money services

Money services business will be expanded to include the following:

dispensation of money;

facilitation of deposits;

payments;

transfer of money or the reporting of account information via automated teller machines (ATMs); and

transmission of money in any form (including electronic money, mobile money or payments of money).

It is instructive to note at this stage that the terms ‘money’, ‘money transmission or ‘money transmitter’ are not defined under the Financing and Money Services Act, 2009 (the FMSA). However, under existing legislation, a reference to money under the laws of the BVI is a reference to fiat currency (ie money that is legal tender in a recognised sovereign state). Hence, at present, money transmission would exclude cryptocurrencies and other virtual currencies. Further, although the definition of transmission of money has been expanded under the Amendment Act to include other forms of money, the definition still excludes virtual currencies since the characteristics of these virtual currencies do not fall within the definition of electronic money, mobile money and payments of money.

New categories of licences

Importantly, the Amendment Act also reclassifies the licences issued under the FMSA. Under the current regime, only two classes of licences are issued, a financing licence authorising the holder to carry on financing business (as defined in the FMSA) or a money services licence, authorising the holder to carry on money services business (as defined in the FMSA). The Amendment Act provides for six categories of licences, Classes A – F. Classes A – D were already possible under the current regime as either a financing or money services licence, albeit the Amendment Act has streamlined the two original classes into further specific classes of licences. Class E is a new class of licence which permits the holder to carry on the business of operating ATMs.

Peer-to-peer lending

As alluded to above, of major significance is the introduction of the Class F category of licence to regulate peer-to-peer lending. The Class F licence permits the holder to carry on the business of international financing and lending in the peer-to-peer (P2P) FinTech market, including peer-to-business (P2B) and business-to-business (B2B) markets. This category will allow online lending platforms to operate from in or within the BVI in a regulated and supervised space. It is to be noted that the Class F licence will not be issued by the Commission until the Amendment Act is in force and regulations are made to provide additional measures for the licensing and regulation of the Class F licence. As at the date of writing, no regulations have been made, but we understand they are well-advanced.

In addition to these amendments to FMSA, the Anti-Money Laundering Code of Practice, 2008 (the AML Code) has been amended by the Anti-Money Laundering and Terrorist Financing (Amendment) (No 2) Code of Practice 2018 to permit the use of electronic and digital means of verification. Now, instead of the traditional way of verifying individuals (eg certified copies of passports and utility bills) as regards KYC obligations, verification of such individuals can utilise proprietary software and programmes to include digital, electrical, magnetic, optical, electromagnetic, biometric and photonic forms of identification. These amendments to the AML Code also include provisions containing pertinent guidance as to when to rely and not rely on these digital forms of verification.

Offering the perfect cocktail of digital products, it is also expected that the Commission will very shortly provide industry guidance on Initial Coin Offerings, the offer and issue of cryptocurrencies, crypto-currency exchanges and the blockchain in general. We are also eagerly awaiting the imminent introduction by the Commission of a regulatory sandbox in order to allow FinTech and other innovators to conduct live experiments in a controlled environment so as to explore new ideas (potentially leading to more affordable products and services). It is therefore yet another ground breaking and trail blazing season in the BVI. The Commission, the private sector and the Government are once again holding hands to create the necessary products, pass the necessary legislation and provide the necessary legal, corporate services and other support to BVI vehicles in an effort to ensure that the territory goes through a digital transformation and keeps itself on the cutting edge of the world’s top class offshore financial services offering.

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Virtual Currency Regulation Review: Cayman Islands chapter
Tue, 11 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/virtual-currency-regulation-review-cayman-islands-chapter/
http://www.harneys.com/insights/virtual-currency-regulation-review-cayman-islands-chapter/
Harneys lawyers contributed the Cayman Islands chapter in the Virtual Currency Regulation Review. The chapter gives a general introduction to the legal and regulatory framework in Cayman. In addition, it looks at the securities and investment laws; banking and money transmission; anti-money laundering; regulation of exchanges; regulation of issuers and sponsors; tax; and other issues. The Virtual Currency Regulation Review is published by The Law Reviews. Download the PDF to read the chapter.]]>
Cayman Islands AML update: 31 December 2018 AML officer deadline reminder and amended guidance notes
Tue, 11 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/cayman-islands-aml-update-31-december-2018-aml-officer-deadline-reminder-and-amended-guidance-notes/
http://www.harneys.com/insights/cayman-islands-aml-update-31-december-2018-aml-officer-deadline-reminder-and-amended-guidance-notes/
As we noted in our earlier alert, investment funds that already existed on 1 June 2018 and which are registered with the Cayman Islands Monetary Authority (CIMA) as mutual funds, have to notify CIMA with details of the natural persons, at managerial level, appointed as their AML Officers¹. These appointments had to be made by 30 September 2018 and the notification has to be filed on CIMA’s REEFS portal by 31 December 2018.

For investment funds that are not CIMA regulated (eg private equity funds and exempt mutual funds) and which were in existence prior to 1 June 2018:

appointments of AML Officers must be made by 31 December 2018, and

there is currently no requirement for them to make any filings with any Cayman Islands authority regarding the details of their AML Officers.

Investment funds formed since 1 June 2018 have had to make these appointments from launch.

CIMA has not issued specific guidance on AML Officer appointments for investment managers registered as excluded persons under the Securities Investment Business Law which were in existence before 1 June 2018. Excluded persons probably also have until 31 December 2018 to make these appointments however, and include those details in their annual declaration in early 2019.

AML Officers can be provided by an investment fund or manager’s service providers. Harneys Fiduciary offers AML Officer services and additional information on our Compliance Outsourcing services can be found here.

Amended AML guidance notes published

CIMA also issued amendments to the AML guidance notes² last week, incorporating and clarifying guidance issued by CIMA during 2018 for financial service providers (FSPs) including Cayman Islands investment entities. The amendments address:

The different requirements for FSPs to consider and implement when deciding whether to rely on a third party service provider to perform some of an FSP’s AML and compliance functions and or delegate performance of those functions to a third party.

That verification of the identity of a client may not be required at the time of receipt of certain payments by bank transfer, in low risk scenarios when payment is from an account in the client’s name at a Cayman Islands licensed bank or a licensed bank in an equivalent jurisdiction. Verification must still be conducted in the usual way before the payment of any proceeds is made.

The need for natural persons appointed as money laundering reporting officers and deputy money laundering reporting officers to be independent, autonomous, have sufficient time to perform their duties and access to all relevant material to perform their role.

Harneys’ Investment Funds and Regulatory team is well versed in all aspects of Cayman’s AML requirements, so please contact your usual Harneys contact if you would like advice on compliance with the AML regime in Cayman. If you have any other questions, visit www.harneys.com/Cayman.

² The Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands, 13 December 2017.

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Illegality defense developments in UK and Cayman Islands
Fri, 07 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/illegality-defense-developments-in-uk-and-cayman-islands/
http://www.harneys.com/insights/illegality-defense-developments-in-uk-and-cayman-islands/
The principles that a person should not benefit from his own wrongdoing and that the law should not condone illegality are longstanding. Keen legal historians might be aware that these are precepts in Roman law and there are echoes in Deuteronomy. In its broadest form, it extends to conduct which is not just illegal but also unethical. Download the PDF to read more.]]>
Investment funds in Cyprus (non-UCITS)
Fri, 07 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/investment-funds-in-cyprus-non-ucits/
http://www.harneys.com/insights/investment-funds-in-cyprus-non-ucits/
Cyprus is one of the up and coming funds jurisdictions in the European Union. For years popular for foreign direct investment in Central and Eastern Europe and the Middle East, the Cyprus’ funds regime now caters fully for pan-EU regulation under the Alternative Investment Fund Managers Directive 2011/61/EU while concurrently providing for lighter-touch alternatives. Importantly, Cyprus continues to be one of the most tax-competitive jurisdictions in the EU. Download the PDF to read more about investment funds in Cyprus.]]>
Getting the Deal Through: British Virgin Islands Complex Commercial Litigation
Tue, 04 Dec 2018 00:00:00 +0000
http://www.harneys.com/insights/getting-the-deal-through-british-virgin-islands-complex-commercial-litigation/
http://www.harneys.com/insights/getting-the-deal-through-british-virgin-islands-complex-commercial-litigation/
Andrew Thorp and Jonathan Addo give an overview of complex commercial litigation in the British Virgin Islands in the latest chapter of Getting the Deal Through: Complex Commercial Litigation. Download the PDF to read more.]]>
European Parliament resolution on distributed ledger technologies and blockchain
Fri, 30 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/european-parliament-resolution-on-distributed-ledger-technologies-and-blockchain/
http://www.harneys.com/insights/european-parliament-resolution-on-distributed-ledger-technologies-and-blockchain/
On 3 October 2018, the European Parliament (EP) issued a resolution acknowledging distributed ledger technologies (DLT) and blockchain, it also outlined the sectors in which these may be of use together with the inherent risks[1].

Following on from its resolutions of 26 May 2016 on virtual currencies[2], and 28 April 2017 on ‘FinTech: the influence of technology on the future of the financial sector[3]’, the EP highlights the benefits of DLT and blockchain as a means of empowering citizens by giving them autonomous control of their own data; improved trust and transparency which provides a systematic route for the improvement of key sectors of economy. The EP provides important guidance, through its resolution, to the competent regulators in Member States by stipulating that their approach toward DLT should be innovation-friendly, with a framework that provides legal certainty, enables passporting and respects the principles of technology neutrality and business-model neutrality, while at the same time promoting investor and consumer protection. The EP seeks to ensure reduction of intermediation costs in a transparent environment, while allowing peer-to-peer exchange of value.

Financial sector

The establishment of use of DLT in the financial sector can significantly reduce transaction costs and hidden costs in light of financial disintermediation; through cryptographic algorithms that replace third party intermediaries by using a mechanism that performs the validation, safeguarding and preservation of transactions. Further exploration as to the capabilities of DLT by major financial institutions is encouraged by the EP, who similarly encourages the financial authorities to observe developing trends in the financial sector.

The EP calls for further examination of alternative methods of payment and transfer of value such as cryptocurrencies and emphasises the volatility and overall unpredictability surrounding cryptocurrencies, while encouraging the European Central Bank (ECB) to provide feedback on the sources of such volatility. The EP seeks to examine in further detail the possibilities of incorporation of cryptocurrencies in the European payment system and the dangers that such incorporation may present to the public.

SMEs, technology transfer and financing

The aim is to introduce a harmonised alternative investment instrument which funds small and medium-sized enterprises (SMEs) and innovative start-ups potentially with the use of Initial Coin Offerings (ICO) which is regarded as an essential element within the capital markets union.

The EP calls for further guidelines, standards and disclosure requirements with a view to reducing the risks of fraudulent or illegal activities derived from the lack of consistency in the available information, the ultimate goal being consumer and investor protection.

The EP, more specifically, calls for the creation of an observatory for the monitoring of ICOs and a database of their characteristics and taxonomy which makes the distinction between security and utility tokens. At the same time, they suggest the implementation of a model regulatory sandbox framework and a code of conduct setting harmonised standards but also underlines its proposal not to regulate DLT per se and to remove existing barriers to implementing blockchain.

National authorities are urged to swiftly build up technical expertise and regulatory capacity enabling rapid legislative or regulatory action if and when necessary.

The need for innovative SMEs and start-ups to gain access to funding in order to develop DLT-based projects is further observed. The EP openly invites the ECB and European Investment Fund (EIF) to create funding opportunities to support such endeavours.

Smart contracts

The EP sets out the importance of facilitating the use of smart contracts, which are in element enabled by the DLT and which can act as key enablers of decentralised applications and disintermediation, and stresses the need for an in-depth evaluation of relevant legal implications, such as jurisdictional considerations, as well as an analysis of the existing legal framework in each Member State in respect of the enforceability of such contracts. The EP also underlines the importance of legal certainty as to the validity of a digital cryptographic signature which would be critical in furthering and facilitating the use of smart contracts.

Utilisation of DLT in other sectors

The EP is keen to support the use of DLT across different sectors, including the production and consumption of green energy and in particular, improving the efficiency of energy exchanges through DLT between households on a peer-to-peer basis, democratising the energy market and creating alternatives to state-sponsored renewable investment schemes.

The potential of DLT in improving mobility and logistics for the transport industry, including the administration, registration and verification of vehicles, distances and smart insurance, is also underscored by the EP.

The potential of DLT in the healthcare sector is further examined in terms of improving data efficiency, the exchange of such data across public and private sectors, and allowing EU citizens to control their own health data.

The EP takes the view that DLT can also be used as a tool to improve and monitor supply chains, in terms of protocols; transparency and visibility, as to source and origin of goods; ingredients and components; compliance; and overall consumer protection.

In terms of ‘digitalised’ creative content, the EP emphasises the capability of the use of DLT to monitor, track and manage intellectual property and facilitate copyright and patent protection.

General considerations

The EP underscores that the establishment of a DLT ecosystem will inevitably involve self-sovereignty and trust among users who will be able to control what personal data they want to share.

DLT uses must be compliant with the EU legislation on data protection and importantly, the General Data Protection Regulation (GDPR).

The resolution sets out proposed policies with a view to implementing DLT technologies across various sectors in Europe, in line with the EP’s recent Fintech Action Plan; and highlights the opportunity for the EU to become a global leader in the DLT field.

For more information on this matter, please reach out to your usual Harneys contact or the article’s authors.

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Comparative legal guide to Cyprus: Fintech
Thu, 29 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/comparative-legal-guide-to-cyprus-fintech/
http://www.harneys.com/insights/comparative-legal-guide-to-cyprus-fintech/
This country-specific Q&A, published by Legal 500 and the In-House Lawyer, provides an overview to Fintech law in Cyprus. It covers open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech; and is part of the global guide to Fintech. Harneys authors: Partners Aki Corsoni-Husain, George Apostolou, and Associates Katerina Katsiami and Marina Stavrou.]]>
New sanctions reporting obligations in Anguilla, Bermuda, BVI and Cayman
Wed, 28 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/new-sanctions-reporting-obligations-in-anguilla-bermuda-bvi-and-cayman/
http://www.harneys.com/insights/new-sanctions-reporting-obligations-in-anguilla-bermuda-bvi-and-cayman/
On 7 November 2018, the Sanctions (Overseas Territories) (Amendment of Information Provisions) Order 2018 (the AIP Order) came into force. The AIP Order brings the rump of UK Overseas Territories into line with the equivalent regime under UK domestic legislation: financial institutions and professionals must now disclose any knowledge and suspicion of sanctions breaches and asset freezing measures imposed or face criminal penalty.

Why has the law changed?

The law was amended in order to bring the position on sanctions disclosures requirements in the UK Overseas Territories (UKOTs) into line with the position under UK domestic legislation. The UK domestic position was itself updated and enhanced on 8 August 2017 following the coming into force of the European Union Financial Sanctions (Amendment of Information Provisions) Regulations 2017.

Prior to the changes only limited categories of UKOT institutions were subject to disclosure requirements, everyone else was subject to a far looser obligation to provide “reasonable assistance” cooperating with the competent authorities in sanctions enforcement matters. This looser position broadly reflected the position taken under the EU Common Foreign and Security Policy (CFSP) which the UK is bound to implement in the UKOTs. The CFSP is the driving policy for the sanctions regimes in the EU, UK and UKOTs.

Prior to the passing of the AIP Order the only businesses expressly subject to mandatory disclosure requirements under UKOT sanctions regimes were banks and other similar credit institutions. Following the passing of the AIP Order this class of persons has been expanded to include “relevant businesses and professions” comprising:

trust and corporate services providers;

lawyers;

accountants;

auditors;

dealers in precious metals or stones;

real estate agents;

tax advisers; and

casinos.

What needs to be disclosed?

Under the amendments to the various sanctions regimes made by AIP Order all relevant businesses and professions must disclose any knowledge or suspicion in the event that:

a customer is subject to an asset freeze under one of the UKOT sanctions regime; or

an offence has been committed under one of those regimes.

Once a disclosure requirement has been identified it must be submitted to the competent authorities in the relevant UKOT. The competent authorities typically comprise the Governor, the Ministry of Finance or the relevant financial intelligence unit, depending on the relevant sanctions regime in question.

Which sanctions regimes have been amended?

The AIP Order amendments apply to the following UKOT sanctions regimes:

Interestingly the sanctions regime on Russia, Crimea and Sevastopol (2015), which implements ‘sectoral’ sanctions on Russia and a blacklisting of Crimea and Sevastopol in the UKOTs has not been amended by the AIP Order.

Note on Bermuda

Bermuda is not expressly included within the AIP Order further to UK-Bermudian constitutional arrangements that require Bermuda to implement the AIP Order domestically instead. Bermuda has done so under the Bermuda International Sanctions Amendment Regulations 2018. For completeness Gibraltar, being within the European Union, is also not legislated for under the AIP Order. References to UKOTs in this article should be read accordingly.

Next steps

In light of the extra obligations above it has never been more important for businesses and professionals in the UKOTs to fully understand the impact of the live sanctions regimes in existence. For many this will mean the imposition of sanctions compliance policies and training.

If you require any assistance in relation to sanctions reporting requirements, or measures required to ensure compliance, please feel free to reach out to your usual Harneys contact or any of the persons referred to in this note.

The BVI and the Cayman Islands have made a commitment to address the concerns of the EU Code of Conduct Group around economic substance and to introduce appropriate legislation addressing this issue before the end of 2018.

What will the legislation look like?

While both jurisdictions have draft legislation in an advanced state to implement new economic substance requirements and reporting and have been in close discussions with the EU working group, it is not yet publicly available. However, we understand that the legislation will follow closely the approach which has been taken jointly by the Crown Dependencies of Jersey, Guernsey and the Isle of Man (the CDs).

Who will be affected?

Based on what we have seen in the CDs’ draft legislation, we expect the BVI and the Cayman Islands legislation to impose a requirement of economic substance on tax resident companies (and possibly also limited partnerships) engaging in and having gross income from a relevant activity in the jurisdiction. The relevant activities were first identified in OECD guidance and have been expanded slightly to include the following: · Banking business · Insurance business · Shipping business · Fund management business · Financing and leasing business · Headquarters business · Holding business · Intellectual property holding business · Distribution and service centre business

What will affected entities need to do to comply?

Once the legislation is finalised, an analysis will firstly need to be carried out to assess which entities are in scope. Any affected entities will then need to consider their position and take action before the end of their financial period ending in 2019. We expect that entities which are subject to the new rules will need to demonstrate aspects like management, employment, a physical office and/or income production in the relevant jurisdiction, but we do also expect that certain aspects will be able to be outsourced to another entity in the jurisdiction under appropriate monitoring and control. Harneys Fiduciary will be able to provide various services to assist relevant entities with meeting their substance requirements.

When will we know more?

We expect that the draft legislation will be made public in the BVI and the Cayman Islands in the next week to 10 days, following which we will provide a further update to this note. However, if you wish to speak to someone in the meantime, please contact your usual Harneys contact or Ross Munro, Phil Graham, Rachel Graham, Matthew Taber or Amy Roost.

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Comparative legal guide to Cayman Islands: Fintech
Fri, 23 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/comparative-legal-guide-to-cayman-islands-fintech/
http://www.harneys.com/insights/comparative-legal-guide-to-cayman-islands-fintech/This country-specific Q&A, published by Legal 500 and the In-House Lawyer, provides an overview to Fintech law in the Cayman Islands. It covers open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech; and is part of the global guide to Fintech. Harneys authors: Partners Ian Gobin and Matt Taber, and Senior Associate Daniella Skotnicki.]]>
Comparative legal guide to British Virgin Islands: Fintech
Wed, 21 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/comparative-legal-guide-to-british-virgin-islands-fintech/
http://www.harneys.com/insights/comparative-legal-guide-to-british-virgin-islands-fintech/
This country-specific Q&A, published by Legal 500 and the In-House Lawyer, provides an overview to Fintech law in the British Virgin Islands. It covers open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech; and is part of the global guide to Fintech. Harneys authors: Partners Philip Graham and Greg Boyd, and Counsel Ayana Hull.]]>
Risky business: directors’ indemnities and exculpation in the Cayman Islands
Thu, 15 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/risky-business-directors-indemnities-and-exculpation-in-the-cayman-islands/
http://www.harneys.com/insights/risky-business-directors-indemnities-and-exculpation-in-the-cayman-islands/
In the Cayman Islands, where there is no specific law on directors’ duties, it’s common for company articles of association or service contracts to limit or exclude directors’ liability or indemnity. In a recent article published by Global Restructuring Review, Partner Nick Hoffman and Senior Associate Gráinne King examine some of the key terms found in these limitation or exclusion clauses, as well as a number of fresh developments in Cayman Islands case law. Download the PDF to read the article.]]>
Alternatives to just and equitable winding up in practice
Wed, 14 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/alternatives-to-just-and-equitable-winding-up-in-practice/
http://www.harneys.com/insights/alternatives-to-just-and-equitable-winding-up-in-practice/
This article, published in the InterContinental Finance & Law magazine, discusses alternatives to just and equitable winding up in practice and illustrates some of these alternatives with case examples, before considering the extent to which there is still a place for such relief. Download the PDF to read more.]]>
The British Virgin Islands simplifies the way to deal with compliance services
Mon, 05 Nov 2018 00:00:00 +0000
http://www.harneys.com/insights/the-british-virgin-islands-simplifies-the-way-to-deal-with-compliance-services/
http://www.harneys.com/insights/the-british-virgin-islands-simplifies-the-way-to-deal-with-compliance-services/
British Virgin Islands (BVI) law places significant importance on the role and function of compliance, and in particular, the compliance officer in so far as it relates to financial services licensees.

Traditionally, only an individual could be approved as the compliance officer of a licensee. However, in order to adapt to a more modern approach to compliance, the Financial Services Commission Act 2001 (the FSC Act) has been amended recently to now allow for corporate compliance function services to be provided to licensees.

What does the change in the law mean?

Under the amendments to the FSC Act, the Financial Services Commission (the Commission) may on receipt of a written application approve a body corporate to undertake the duty of providing compliance function services for licensees. Importantly, no licensee should engage the compliance function services of a corporate entity unless the licensee has submitted an application in writing identifying a senior officer within the licensee who would have responsibility for overseeing the compliance function of the licensee and the senior officer is approved by the Commission.

A streamlined process for approval

The change is welcome in that it streamlines and sets standards for the industry in the BVI as to the organisations that may provide compliance function services to third party licensees. Previously such standards focussed entirely on the individuals who would act as compliance officers. In practice this approval process could take time as the process was the same as those used to assess executive directors and ultimate beneficial owners, termed the “Form A” approval process.

As with all licensing regimes, the quid pro quo however is that now no BVI-based ‘licensee’, such as a fiduciary services provider, may engage in the provision of compliance function services to others unless they have been approved by the Commission. Though time will tell, we understand that unapproved providers of compliance officers based outside of the BVI would, in practice, continue to be able to provide services but the approval of the compliance officer would be handled by the Commission in the old way, ie through the Form A approval process.

What is needed for the application?

In preparing the application to the Commission, the following points will need to be satisfied, that the corporate entity:

is incorporated under the BVI Business Companies Act 2004 and not struck off or dissolved;

is physically resident in the BVI;

employees are physically resident in the BVI and any absences are not in excess of 90 days;

has provided a written undertaking indicating that it will not assign or deploy any employees to perform compliance functions for and or on behalf of a licensee unless such employees are approved by the Commission and appointed formally by the licensee in relation to the Commission’s approval;

has a primary responsibility to provide compliance function services to licensees that are based in and carrying on business in or from within the BVI;

will have within 180 days and before commencing business, the relevant number of employees considered sufficient to perform the compliance officer duties having regard to the number, nature, size and complexity of the licensees to which the services are geared; and

understands the business of the licensees.

How can we assist?

Harneys has a fully-fledged regulatory team who can assist with:

advising corporate entities on their obligations under the financial services legislation;

preparing the application to the Commission to have the corporate entity as well as the individual compliance officers approved; and

preparing the necessary business plans to satisfy the requirements outlined above when corporate entities are considering submitting an application to the Commission for approval to conduct compliance function services.

The Common Reporting Standard (CRS) obligations in the MLAT were also amended to require BVI financial institutions to establish, implement and maintain written policies and procedures to comply with their CRS obligations and to file nil returns with the ITA when they have no reportable accounts.

Why has the MLAT been amended?

The country-by-country reporting changes to the MLAT are part of the BVI’s implementation of the OECD’s BEPS framework, implementing the country by country reporting and notification requirements. Taken together, the CRS and country-by-country reporting changes demonstrate BVI’s continued commitment to international best practice on exchange of information with participating tax authorities, adding to reporting and notification obligations under BVI’s implementation of FATCA, CRS and beneficial ownership registers.

What has changed for CRS reporting?

Under the changes to the MLAT, BVI financial institutions (FIs) must now:

establish, implement and maintain written policies and procedures addressing their CRS obligations;

register: all BVI FIs are now required to register with the ITA. While Reporting FIs should already have registered, non-reporting FIs[1] will now have to register with the ITA; and

file a nil return with the ITA when they maintain no reportable accounts.

What should BVI financial institutions do to comply?

BVI FIs which have delegated their automatic exchange of information (FATCA and CRS) compliance work to a third party service provider should review their service agreements (whether part of an administration agreement or a standalone agreement) to make sure that the agreement details the specific AEOI compliance obligations that have been delegated.

FIs’ written CRS policies and procedures should cover any CRS obligations not delegated to a service provider and where certain obligations have been delegated, procedures for oversight of the service provider.

Existing non-reporting FIs should register with the ITA by 30 April 2019. All FIs being set up going forward should register with the ITA by the 30th April following their establishment.

Who does country-by-country reporting impact?

MNE groups are caught by the country-by-country reporting requirements if they have annual consolidated group revenue in the preceding financial year of Euro 750 million or more and a BVI entity in the group. BVI entities should now consider whether they are part of an MNE group and address any reporting or registration and notification obligations.

Is your BVI entity part of an MNE group?

The amended MLAT applies to:

any group of enterprises related through ownership or control that is required to prepare consolidated financial statements;

where the group includes two or more enterprises which are tax resident in different jurisdictions; and

where the total consolidated group revenue is Euro 750 million or more during the relevant fiscal year.

Guidance notes may be issued by the ITA to help businesses that may have responsibilities to report or register and notify information under the MLAT and we will issue a further client update if guidance notes are published.

What are the registration and notification obligations for MNE group members?

Any MNE group member that is tax resident in the BVI must register electronically with the ITA (on the ITA’s electronic portal) no later than the last day of the MNE group’s annual accounting period which starts on or after 1 January 2018 (the Last Day).

MNE group members that are tax resident in the BVI but are not the ultimate parent or surrogate parent of the group also have to register electronically with the ITA the identity and tax residence of the relevant reporting entity, no later than the Last Day.

Any subsequent changes to this information have to be registered immediately with the ITA.

In practice, BVI entities in an MNE group with a calendar year accounting period will need to register with the ITA by 31 December 2018.

MNE group members that fail to register with the ITA when required commit an offence and are liable to a fine of up to US$100,000.

What are the reporting obligations for qualifying MNE Groups?

Each ultimate parent entity[2] of an MNE group that is tax resident in the BVI will need to file a CbC Report with the ITA in respect of the group’s reporting fiscal year.

The CbC report will need to include aggregate financial information for each jurisdiction in which the MNE group operates and details of each constituent entity of the MNE group.

A BVI constituent entity is required to file a CbC Report with the ITA unless the ultimate parent entity or surrogate parent entity of the MNE Group reports in another jurisdiction which has a qualifying competent authority agreement (information exchange agreement) with the BVI.

The information filed in CbC Reports will then be exchanged with tax authorities in other participating jurisdictions.

The first reporting year under the MLAT is the fiscal year which began on or after 1 January 2018.

A reporting entity that is resident in the BVI must make its first CbC Report by no later than 12 months after the last day of the reporting fiscal year of the MNE group.

What action should BVI entities take now?

All BVI entities that are part of a group structure should now consider if they are part of an MNE group under the MLAT. If they are, they will need to confirm if they are a parent entity with reporting and registration obligations or another constituent entity with registration obligations to the ITA, and whether they have to comply with those obligations by 31 December 2018 or later.

How does country-by-country reporting affect BVI investment funds?

There is no general exemption from the CbC Report regime for BVI investment funds or their managers and each case should be looked at based on the specific circumstances. Given the thresholds that apply however, most BVI investment funds and investment management entities are not expected to fall within the scope of the CbC Report regime. In order for a fund/s to be in scope, all of the following questions would have to be answered 'Yes':

Are consolidated financial statements required for the fund as part of a group of investment entities?

Are the group entities domiciled in more than one jurisdiction?

Is the revenue of the group Euro 750 million or more?

Revenue would include all revenue, gains, income and other inflows from the consolidated income statement or profit and loss statement and assets under management would not be considered revenue.

How can we assist?

If you would like advice on whether the amendments to the MLAT apply to your BVI entity or group and require assistance with any of the notification or registration requirements, feel free to contact any member of Harneys’ automatic exchange of information team or your usual Harneys contact or visit www.harneys.com/bvi.

[1] Those FIs falling under an exemption to report under the CRS regime such as trustee documented trusts, exempt collective investment vehicles, pension funds.

[2] A constituent entity that in/directly owns a sufficient interest in one or more other constituent entities of the MNE group so that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, and there is no other constituent entity of the MNE group that in/directly owns such an interest in the first constituent entity.

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When hedge funds become illiquid, what options are open to investors?
Thu, 25 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/when-hedge-funds-become-illiquid-what-options-are-open-to-investors/
http://www.harneys.com/insights/when-hedge-funds-become-illiquid-what-options-are-open-to-investors/
The 2008 financial crisis led to a surge in the number of funds facing liquidity issues. This was, in part, down to global macro events, but more prominently as a result of unrealistic expectations of liquidity as against investment return. This article, published by IFLR, is a discussion and analysis of the options open to investors by Cayman law when issues of liquidity arise. Firstly, looking at the wind down process associated with normal liquidity situations, partner Matthew Taber and senior associate Katie Pearson assess the process associated with suspension of redemptions, followed by an analysis of an official court room liquidation. Download the PDF to read more.]]>
The Asia-Pacific Restructuring Review 2019 - Offshore: Cayman Islands
Thu, 25 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/the-asia-pacific-restructuring-review-2019-offshore-cayman-islands/
http://www.harneys.com/insights/the-asia-pacific-restructuring-review-2019-offshore-cayman-islands/
The Cayman Islands has a globally recognised, comprehensive and creditor-friendly regime to facilitate domestic and cross-border insolvencies and restructurings, with effective procedural rules in place both for practitioners and the courts. Download the PDF to read more about the most recent developments in the restructuring and insolvency sphere in the Cayman Islands from the Global Restructuring Review Special Report - The Asia-Pacific Restructuring Review 2019. ]]>
Getting the Deal Done: What to do when your registered agent goes rogue
Wed, 24 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/getting-the-deal-done-what-to-do-when-your-registered-agent-goes-rogue/
http://www.harneys.com/insights/getting-the-deal-done-what-to-do-when-your-registered-agent-goes-rogue/
The registered agent fulfils a key role for BVI companies, including the thousands currently doing business across Asia. Occasionally, to the chagrin of the dealmaker, a registered agent may (however inadvertently) hold up a transaction by refusing to take a step which is within their power and vital to getting a deal completed. Based on practical examples from deals on which Harneys has worked recently, Joshua Mangeot and George Weston consider the rights of directors and members and the options available to dealmakers in this article originally published by Asian Legal Business. Download the PDF to read more.]]>
Alternatives to just and equitable winding up
Tue, 23 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/alternatives-to-just-and-equitable-winding-up/
http://www.harneys.com/insights/alternatives-to-just-and-equitable-winding-up/
This article, published in the InterContinental Finance & Law magazine, considers the available alternatives to just and equitable winding up, including the gateway to be met before any alternative orders can be made. In addition, it also considers derivative actions, including general rule and exceptions, as well as recent guidance on the ‘fraud on the minority’ exception. Download the PDF to read more.]]>
Are BVI companies entering a period of hyperactivity?
Thu, 18 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/are-bvi-companies-entering-a-period-of-hyperactivity/
http://www.harneys.com/insights/are-bvi-companies-entering-a-period-of-hyperactivity/
Statistically speaking, it has been a strange 12 months for British Virgin Islands company registrations. The Financial Services Commission (finally) published its quarterly statistics for Q1 2018, and these showed a 12 per cent year on year surge in incorporations as against the previous quarter. In fact, it was the highest rate of quarterly incorporations for nearly three years. Incorporation rates have traditionally been treated as a bellwether for the BVI finance industry as a whole (rightly or wrongly), and so enthusiastic press releases were the order of the day.

But it caps a slightly wild and wacky recent ride for BVI incorporation figures. Industry insiders might cast their minds back to 1 July 2017, when the BVI introduced the Beneficial Ownership Search System Act enabling UK law enforcement access to beneficial ownership information relating to BVI registered companies. At that time there was a huge amount of doom and gloom about how clients might react to this incursion into their privacy. And then, to the surprise of just about everybody, incorporation rates went up.

The next “big thing” that happened was Hurricane Irma. A demon from hell masquerading as a Category 5 hurricane, stormed into town on 6 September 2018 and caused enormous damage in the Territory, although to its eternal credit the Companies Registry was only down for a few days. Again, in the ordinary course of things, this might have been expected to have a strong negative effect on incorporation rates, but once again, to the surprise of most people, Q4 incorporation rates were up by nearly 12 per cent against the previous quarter, and nearly 10 per cent on the same quarter in the previous year.

And then that brings us to the latest, stellar, quarterly performance. So, it seems reasonable to ask the broader question – what gives? On the surface it looks like unmitigated good news, and a strong endorsement of the BVI product. But let’s dig a little deeper into the numbers to see what else we can find. One other fairly striking statistic is the registered agent resignation numbers for Q2 and Q3 of 2017. These were the two quarters surrounding the introduction of the BOSS system, and resignation rates were over 10,000 for each quarter. Prior to that, the highest recorded figure for a quarter was just 1,397. That points to a significant cleaning up of the book by a number of registered agents. That may or may not be connected with the higher numbers of new registrations, although it is hard to construct a narrative which links resignation of old companies to registration of new ones.

The other statistic that jumps out as an outlier is registration of security interests. As a finance lawyer this is a metric which I pay keen attention to. The more security registrations which are occurring, the more debt financing is going through BVI companies, the more commercial activity they are involved in. And the last three quarters have the three highest rates of security registrations on record. Companies are not only being formed at an enhanced rate – they are also pretty active.

Taking the mishmash of statistics together, there isn’t a single obvious narrative that jumps out, but the one which seems most likely is this: BVI companies are entering a period of hyperactivity because the global economy is racing right now. High growth rates combined with rising interest rates have caused a surge in SPV formation seeking to capitalise on lower borrowing rates before monetary conditions tighten.

Whether that means that the recent surge in incorporation rates is sustainable or whether they are more likely to fade back towards medium term trend lines is something to watch for in future quarterly statistical reports.

Harneys global funds practice advises on all aspects of offshore investment funds, establishment, maintenance and restructuring both in distressed and planned scenarios. Harneys sees itself as a market disrupter in the offshore funds space; a law firm that always brings personality to the table with its clients.

This disruptive mindset marries well with the rising trend of another market disruption in the form of crypto strategies. Three or more years ago, Harneys took the collective decision that this could be a crucially important industry, despite its infancy at the time and something to embrace, as a forward-looking, progressive law firm. This led Harneys to develop a dedicated global FinTech practice that includes a wide number of partners in the Cayman Islands, the BVI, Vancouver and Hong Kong.

“We approach the offshore legal world from a slightly different angle and try to offer clients a fundamentally different service (compared to traditional law firms) and we all jumped at the chance to be active in the crypto space,” explains Philip Graham (pictured), who heads up Harneys’ BVI Investment Funds and Regulatory team. “The crypto/blockchain arena is absolutely aligned with our core values of entrepreneurial thinking and we wanted to be a key player in a new market as it evolves and matures.”

This level of focus so early on helped to position Harneys as one of the main ‘go-to’ offshore law firms for ICOs and crypto-asset funds. Having partners such as Lewis Chong, who runs the Vancouver office, gives Harneys an ideal vantage point from which to keep track of new managers as well as new product innovations in the crypto space, given his West Coast location and remit.

“With some of the bigger institutional managers also now looking into this blossoming space, I’m delighted we decided to embrace this new asset class and it has allowed us to build up an unrivalled level of expertise” adds Graham.

Unsurprisingly, crypto and ICO mandates have been the dominant part of new instructions that Harneys has received over the last year. That said, there is always a degree of caution with respect to ICOs.

As Graham confirms: “We have been involved in a number of ICOs, including the world’s largest ICO last year (at the time) which raised over USD1 billion, but we are treading enormously carefully with some fundamental checkpoints because the risk profile is still very high.”

“We absolutely look to work with token/coin issuers that are seeking to use the very highest AML/KYC standards and with more and more service providers coming into the market who can offer a high level of verification work, this is undoubtedly seeing a sophistication in the ICO market already, making them a much more feasible proposition,” says Graham.

One reason for explaining Harneys’ willingness to embrace the new is partly down to the partners all being relatively young and of a broadly similar age.

“What is great about being part of a law firm like this is that it is always open to new ideas. The progressiveness of Harneys is something that I think defines who we are and how we work. I can confidently say that our FinTech group is a market leader in the offshore space and this is standing us in good stead,” remarks Graham.

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BVI further amends trust company law and regulation
Tue, 16 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/bvi-further-amends-trust-company-law-and-regulation/
http://www.harneys.com/insights/bvi-further-amends-trust-company-law-and-regulation/
The BVI has recently amended the Banks and Trust Companies Act 1990 (the BTCA) and the Company Management Act 1990 (the CMA). The amendments seeks to further modernise the BTCA and CMA regimes by taking into account new developments and providing new licence classes of trust and corporate service providers relevant to family and other closely held groups.

New BVI regulated products (BTCA)

Amendments to the BTCA gazetted on 3 August 2018 and in force as of 1 October 2018 create two additional classes of licences, namely a Class IV trust licence and a Class V licence:

The Class IV trust licence allows the holder to carry on trust business and company management business by family offices and other closely held groups.

The Class V licence allows the holder to carry on company management business only by family and other closely held groups.

There is an indication that the nature and scope of family business and other closely held group business will be outlined in the Regulatory Code 2009 (the Code). However, at the time of writing, there has been no update to the Code.

Where the BVI Financial Services Commission (BVIFSC) issues a Class IV trust licence, the licensee would be restricted to administering no more than 500 British Virgin Islands (BVI) companies and 50 trusts, have a physical presence in the BVI and may not engage in introduced or third party business.

Where the BVIFSC issues a Class V licence, the licensee would be restricted to administering no more than 300 BVI companies, have a physical presence in the BVI, not engage in any trust business and not engage in introduced or third party business.

Streamlining functionality (BTCA and CMA)

Authorised agents

Amendments to the BTCA and the CMA also redefine the functions of an authorised agent to include the acceptance, on behalf of a licensee, the service of documents, whether arising from a legal process or otherwise.

Under the BTCA and CMA each licensee must appoint at least two (2) BVI-resident natural persons to act as authorised agents. Historically, these agents have had a limited role and the recent amendments look to better define the precise functions to be undertaken by them.

Scope of registered agent services

The amendments to the BTCA and the CMA creates a new provision to expand on the nature and scope of registered agent services and to empower the BVIFSC to restrict a registered agent or class of registered agents from performing the function of registered agent in relation to a BVI business company or a corporation incorporated under an enactment, a foreign company or a limited partnership. This is designed to ensure that persons performing registered agent services have the necessary resources and a good compliance record to be able to execute and provide the registered agent services effectively.

Registered office services

In addition, any person who provides registered office services, or generally carries on company management business pursuant to the CMA would effectively be performing registered agent services. The BVIFSC is also now empowered under the BTCA and the CMA to be allowed to make an order against a registered agent and to have that order published on the BVIFSC’s website to restrict the registered agent or any class of registered agents from acting as a registered agent of any entity, unless the person or class of persons meets such conditions as may be specified by the BVIFSC in the Code.

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The British Virgin Islands’ fintech revolution
Mon, 15 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/the-british-virgin-islands-fintech-revolution/
http://www.harneys.com/insights/the-british-virgin-islands-fintech-revolution/
The BVI is reportedly the second biggest cryptocurrency market in the world, according to statistics published by CoinShares, which used data collected from the 15 biggest cryptocurrency exchanges and concluded that the BVI had a trading volume in crypto assets valued at US$78.5 billion, in the first six months of 2018. This puts it just US$5.3 billion behind the USA. We also noted in a recent PwC report that two of the three largest Initial Coin Offerings (ICOs) have also been domiciled in the BVI.

These startling statistics come as no surprise to those of us at Harneys who have been at the coal-face of the crypto buzz for a number of years now and have seen quite incredible activity in this area, which includes not only ICOs and cryptocurrency exchanges, but also a high volume of investment fund launches which are solely focused on this unique asset class.

The opportunity for the jurisdiction to be one of the pioneers in this space has not been lost by both the public and private sector alike and with a combination of joint initiatives and forums, the laws and regulations in the BVI are adapting to ensure that this area is lightly but appropriately regulated to meet the overwhelming demand of the global client base.

We have already seen in June of this year, the launch of the micro business company or MBC. Aimed at small, non-financial sector businesses anywhere in the world, MBCs will be simpler to set up and operate, with lower registration and annual fees. One of the key aspects is that MBCs will be able to be formed and accessed through a smartphone, with AML checks being done via an app connecting to the Regulator’s IT platform.

On top of that, we have also seen an amended AML Code of Practice this summer, which allow operators carrying out BVI AML checks to use the latest electronic innovations to improve and speed up KYC processes, including the approval of a digital verification system.

We have already had the new Limited Partnership Act, 2017, which came into force at the start of the year and provided a ground-breaking new limited partnership structure, drawing on best practice for these structures from around the world and we will very shortly have a huge expansion on the use of segregated portfolio companies, to provide an unregulated and flexible solution to meet the requirements of clients who are seeing innovative new ways to operate SPCs.

Harneys has worked tirelessly on all of these initiatives and we are delighted that the jurisdiction has been able to move so positively despite the challenges that Hurricane Irma brought on last year. It is a true testament to both the resilience and forward thinking nature of these islands.

With hotly anticipated legislation expected in the ICO and digital asset exchange areas, as well as potentially the introduction of a Regulatory Sandbox in the BVI, we anticipate that the BVI’s fintech movement will only continue to go from strength to strength.

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Recent Uncertainty Concerning The UK's Proper Purpose Rule
Thu, 11 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/recent-uncertainty-concerning-the-uks-proper-purpose-rule/
http://www.harneys.com/insights/recent-uncertainty-concerning-the-uks-proper-purpose-rule/
In recent years, where take-private transactions and corporate restructurings have become increasingly common, the actions of directors have come under scrutiny as they push the boundaries of the proper purpose rule. Nick Hoffman and Conal Keane examine the differing powers, and the remedies available to shareholders who object to a proposed course of action by the directors in this article originally published by Law 360. Download the PDF to read more.]]>
Act now – Don’t get struck-off
Wed, 10 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/act-now-don-t-get-struck-off/
http://www.harneys.com/insights/act-now-don-t-get-struck-off/
Following recent changes to BVI legislation, companies in the British Virgin Islands risk being struck-off by the registrar for not filing particulars of their directors.

Necessary action

To prevent the risk of strike-off ensure that the details of your directors are submitted to the Registrar and any outstanding fees or penalties are paid. Going forward any subsequent changes to directors’ particulars should be reported to the Registrar on a continual basis within 30 days of any change.

Please contact your usual Harneys Corporate Services representative (the company’s registered agent) to ensure details of the directors of your company are up to date and all necessary filings have been made with the Registry.

Background

Filing a register of directors with the Registrar of Corporate Affairs is mandatory under section 118B of the BVI Business Companies Act 2004 (the BCA).

The register of directors, however, is not accessible by any person other than the Registrar, a company’s registered agent and/or any other person authorised in writing by the company, unless:

a company makes an election for it to be public

it is made public pursuant to a court order; or

a competent authority acting in the exercise of its powers as a regulator of financial services business, tax administrator or law enforcement agency makes a written request to access the register

file particulars of their directors with the Registrar within 21 days of the appointment of their first directors; and

file any changes to the register of directors within 30 days of such change

There are, however, still a number of companies that have not yet made the required filing with the Registrar. As a result, action has been taken and the law has been changed.

Changes to the legislation

Penalties and fees

The BVI Business Companies (Amendment of Schedule 1) (No 3) Order 2018, which came into force on 1 September 2018, contains important changes to the penalties and fees for late filing of information in relation to directors.

Previously, where a company was late filing particulars of its directors it was subject to a penalty of up to US$8,000. This has now been reduced to US$5,000. A company is also now entitled to a refund in respect of the excess of any fees which it has paid for non-compliance, over the new US$5,000 cap.

Strike-off

Significantly, a striking-off process for non-compliant companies has now been implemented so that any company which has not supplied its directors’ particulars by 31 December 2018 risks being struck-off the register of companies.

Where a company has been struck-off the Register, the company, its directors, its members and any liquidator appointed in respect of the company may not (i) commence legal proceedings (ii) carry on any business (iii) defend any legal proceedings (iv) make any claim in the name of the company or (v) act in any way with respect to the affairs of the Company.

Good standing

On 1 October 2018 the BVI Business Companies (Amendment) Act 2018 came into force which amended section 235 of the BCA in relation to the conditions for ordering a certificate of good standing from the Registrar. If a company has not filed a copy of its register directors with the Registrar, the Registrar will not issue a certificate of good standing in respect of the company.

Importance of maintaining good standing

A company or a person may require a certificate of good standing for a number of reasons which include:

conducting foreign business

entering into banking and financing transactions

opening bank accounts

due diligence matters

legal opinions

corporate governance, and

compliance and audit

Having the ability to readily obtain and produce a certificate of good standing is not to be underestimated as it can significantly speed up and assist with a multitude of transactions. Also, if a company fails to maintain its good standing status there is a likelihood that this will constitute an event of default under some or all of its existing contractual obligations.

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The Restructuring Review: Cayman Islands
Tue, 09 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/the-restructuring-review-cayman-islands/
http://www.harneys.com/insights/the-restructuring-review-cayman-islands/
Harneys lawyers contributed the Cayman Islands chapter in the Eleventh Edition of The Restructuring Review. The chapter gives an overview of restructuring and insolvency activities as well as a general introduction to the restructuring and insolvency legal framework in Cayman. It sets out significant transactions, addresses international issues in cross-border cases, and looks at future developments for the jurisdiction. The Restructuring Review is published by The Law Reviews. Download the PDF to read the chapter.]]>
The Restructuring Review: British Virgin Islands
Mon, 08 Oct 2018 00:00:00 +0100
http://www.harneys.com/insights/the-restructuring-review-british-virgin-islands/
http://www.harneys.com/insights/the-restructuring-review-british-virgin-islands/
Harneys lawyers contributed the British Virgin Islands chapter in the Eleventh Edition of The Restructuring Review. The chapter gives an overview of restructuring and insolvency activities as well as a general introduction to the restructuring and insolvency legal framework in the BVI. It sets out recent legal developments, addresses international issues in cross-border cases, and looks at future developments for the jurisdiction. The Restructuring Review is published by The Law Reviews. Download the PDF to read the chapter.]]>
Cayman Islands: AML Officers
Wed, 26 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-aml-officers/
http://www.harneys.com/insights/cayman-islands-aml-officers/
The Cayman Islands Monetary Authority (CIMA) announced on 24 September that grace period extensions had been given for the appointment and notification of the appointment of anti-money laundering compliance officers, money laundering reporting officers and deputy money laundering reporting officers (AML Officers) for investment funds.

Technically these extensions have never officially applied to other types of Investment Entity such as investment managers registered as excluded persons under the Securities Investment Business Law, but in practice CIMA have used the deadline references interchangeably in their correspondence with members of the industry.

As we set out in our earlier alert, all Investment Entities which are subject to the AML Regulations have been required to designate natural persons, at managerial level, as their AML Officers since the beginning of 2018.

CIMA had given an initial grace period of up to 30 September for compliance with these requirements to investment funds that were in existence prior to 1 June 2018.

We have now confirmed with CIMA the intention of their 24 September announcement and have set out below the current status as we understand it.

What are the new deadlines for investment funds?

For investment funds that already existed on 1 June 2018 and which are registered with CIMA as mutual funds:

appointments of AML Officers must be made by 30 September 2018

notification of AML Officers by making a filing on CIMA’s REEFS portal must be made by 31 December 2018

For investment funds that are not CIMA regulated (eg private equity funds and exempt mutual funds) and which were in existence prior to 1 June 2018:

appointments of AML Officers must be made by 31 December 2018

there is currently no requirement for them to make any filings with any Cayman Islands authority regarding the details of their AML Officers

But what about SIBL registered investment managers?

Until very recently it was not even possible to make a filing on the REEFs portal relating to the appointment by a SIBL registered excluded investment manager of AML Officers and CIMA had confirmed to Harneys that those updates could be done when the annual declaration (in a new format) was submitted for the following calendar year.

This means that to all intents and purposes SIBL excluded persons in existence prior to 1 June 2018 probably have until 31 December 2018 to make these appointments and file an updated annual declaration.

Harneys’ investment funds and regulatory team is well versed in all aspects of the new requirements, so please contact your usual Harneys contact if you would like advice on compliance with the AML regime in Cayman or if you have any other questions or visit harneys.com/Cayman. Additional information on Harneys Compliance Outsourcing services can be found here.

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Cyprus introduces a new fund vehicle: the Registered Alternative Investment Fund
Fri, 21 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/cyprus-introduces-a-new-fund-vehicle-the-registered-alternative-investment-fund/
http://www.harneys.com/insights/cyprus-introduces-a-new-fund-vehicle-the-registered-alternative-investment-fund/
On 31 July 2018, the highly anticipated Alternative Investment Funds Law 2018 (New AIF Law) came into force, repealing the pre-existing regime. Among its key innovations, the New AIF Law introduces the Registered Alternative Investment Fund (RAIF). The RAIF vehicle now sits alongside the existing range of AIF products available in Cyprus. RAIFs are specifically relevant to professional and ‘well-informed’ investors and will significantly streamline the establishment process. This update outlines key aspects of RAIFs in Cyprus.

RAIF set-up and marketing

The introduction of Registered Alternative Investment Funds in Cyprus is regarded as a significant development portraying and confirming the jurisdiction’s desire to remain at the forefront of regulatory advancements governing the fund industry in Europe. Importantly, the fund set up process in Cyprus is now significantly expedited, due mainly since RAIFs are not subject to licensing or authorisation processes by the regulator, the Cyprus Securities and Exchange Commission (CySEC). In contrast existing AIFs, whether for professional or retail markets, would be subject to often time-intensive application processes with CySEC.

All RAIFs must appoint a duly authorised Alternative Investment Fund Manager (AIFM). AIFMs in Cyprus are regulated by CySEC under the Alternative Investment Fund Managers Law 2013 which implements the Alternative Investment Fund Managers Directive 2011/61/EU.

This means that Cypriot RAIFs will benefit from the pan-EU passporting regime contained in the AIFMD. In consequence marketing RAIFs across Europe can be significantly streamlined when compared to non-EU jurisdictions as the manager may rely on cross-border passporting arrangements to access all 31 EEA jurisdictions. There is no need to rely on private placement regimes.

Advantages of the Cypriot RAIF

Under the New AIF Law:

RAIFs are not subject to authorisation and licensing procedures, but to a mere registration with CySEC.

CySEC needs to be notified only about the setup of a RAIF will minimal ongoing reporting requirements. To this effect, CySEC maintains a special register for RAIFs, and includes approved RAIFs in this register.

There are no minimum capital requirements in respect of setting up a RAIF in Cyprus.

A RAIF may be open-ended or closed-ended; it may be organised in any legal form available under Cypriot law, which currently includes companies (variable and fixed capital), limited partnerships and common funds (similar to unit trusts).

The composition of a RAIF may consist of an unlimited number of investors. This is in contrast to the pre-existing ‘AIF for Limited Number of Persons’ (AIF LNP) which has been limited to 75 investors historically.

RAIFs may be structured in the form of an umbrella fund, maintaining a number of legally segregated sub-funds or multiple investment compartments (similar to segregated portfolio companies or protected cell vehicles).

There are no significantly rigid investment restrictions in respect of RAIFs. The only caveat to this is that fund of funds, money market funds or loan origination funds are subject to special requirements.

The assets under management of a RAIF are subject to no limitation.

Key requirements for a RAIF

As mentioned, RAIFs are not subject to ongoing monitoring by CySEC. They must be externally managed by an AIFM established and licensed in Cyprus or in any other EU / EEA member. It is for the AIFM to ensure the general supervision and compliance in accordance with its own regulatory regime.

RAIFs established as limited partnerships may appoint as managers UCITS management companies or a Cyprus investment firms (CIFs) authorised under MIFID II, instead of AIFMs. In these situations the RAIF would need to be close-ended and invest a minimum of 70 per cent of its funds in illiquid assets.

All RAIFs must appoint a depository, which may be a credit institution (ie a bank) a CIF or other EU MiFID firm. The depositary must have its registered office in the European Economic Area or in a third country provided that CySEC has signed a Memorandum of Understanding for Cooperation and Exchange of Information with the competent authorities of that third country.

Registering a RAIF with CySEC

Whilst the details for the process of registering a RAIF with CySEC are yet to be finalised it is broadly expected that the registration process will enable fund sponsors to set up RAIFs subject to a form of negative consent procedure (or similar), whereby all key characteristics of the RAIF and its service providers are specified and vetted by CySEC acting to strict and streamlined timetables.

Since RAIFs will need to appoint AIFMs it is expected that AIFMs themselves will be required to engage in detailed vetting processes which are managed independently from the direct oversight of CySEC.

Food for thought

Cyprus operates on the cusp of numerous exciting alternative investment markets, from Moscow to Tel Aviv and back again. Undoubtedly regional managers are looking for a cost effective location with time sensitive regulators. We believe that Cyprus will in due time offer the perfect mix in this regard. The recent amendments of the AIF Law and the creation of RAIFs consist of an undeniably significant development in the Cypriot fund industry enhancing considerably investors’ assurance, reliability and trust in Cyprus as an optimal servicing centre for AIFs.

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BVI Legal Update - Autumn 2018
Wed, 19 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/bvi-legal-update-autumn-2018/
http://www.harneys.com/insights/bvi-legal-update-autumn-2018/
Over the last few months, the British Virgin Islands has introduced a number of innovative new and updated laws, enhancing the range of commercially attractive legal structures available in the jurisdiction. The next exciting chapter will be revealed on 1 October, when amendments to the BVI Business Companies Act (BCA) will come into force to expand the use of segregated portfolio companies (SPCs) beyond the funds and insurance sectors. This update looks at the expanded use of SPCs, the new Limited Partnership Act, the Micro Business Companies Act and amendments to the Anti-Money Laundering Code to allow electronic AML checks.

Expanded uses of segregated portfolio companies

Currently, SPCs can be registered in the BVI with the written approval of the Financial Services Commission (FSC) and they can operate as a licensed insurer or a professional, private or public fund. From 1 October, SPCs will also be available for:

holding assets for high net worth persons

operating multiple businesses or types of business which require segregation from the general business of the SPC

engaging in property development and management, including in real estate, ships, aircraft and other property

performing other duties, responsibilities and investments that are not inconsistent with any restriction under the BCA.

The application process and requirements for SPCs and the creation / termination of portfolios by an SPC will vary depending on the SPC’s purpose. Excitingly, the amendments also specifically allow segregated portfolios to enter into contracts or other agreements with another segregated portfolio in the same SPC or with a segregated portfolio of another SPC.

We anticipate that the demand for these structures will be high, especially with our book of family office clients who often enquire about the availability of SPCs, but have been previously put off by the regulated nature of the structure. Given the BVI can now offer an unregulated version, this should increase the flexibility and scope for these vehicles greatly.

Limited partnerships

The Limited Partnership Act, 2017, came into force at the start of this year, modernising the BVI’s limited partnership laws to provide a ground-breaking new limited partnership structure. The new law draws on the popular and very successful BCA, as well as best practice for limited partnership structures from around the world. Key features of the new law include:

the ability to have a limited partnership with or without legal personality

the ability to register a charge against a limited partnership with legal personality on the public register in the BVI and obtain priority under BVI law over subsequent charges

simple, quick, cost effective registration of limited partnerships

an extensive list of safe harbours for limited partners dealing with the partnership, to maintain limited partners’ limited liability

flexibility on the terms of the partnership agreement

inclusion of various corporate law concepts for limited partnerships, including merger (with rights for dissenting limited partners), consolidation, plans and schemes of arrangements, redemption of minority partnership interests and continuations.

Although limited partnerships have been available in the BVI since the 1990s, the new law makes BVI limited partnerships particularly attractive for funds, especially private equity funds. Please see our recent alert on the benefits of new limited partnerships for more details.

Micro Business Companies

In June, the Micro Business Companies Act introduced a brand new, simpler form of limited liability company in the BVI, the micro business company or MBC. Aimed at small, non-financial sector businesses in the BVI or anywhere else in the world, MBCs will be simpler to set up and operate, with lower registration and annual fees of just US$100. MBCs can have a maximum of 10 employees and a US$2 million annual turnover / gross asset value and can convert into a BVI business company if those limits are breached.

MBCs will be able to be formed and accessed through a smartphone, with anti money laundering (AML) checks being done via an app connecting to the FSC’s IT platform. Further changes in the law are in the pipeline to allow MBCs to be set up and we will issue a detailed update when they are available for registration.

Anti-Money Laundering Code updates allow electronic AML checks

With effect from 1 August, the FSC amended the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (AML Code), the BVI financial services industry’s rulebook for customer verification and KYC, so that credit and financial institutions based in the BVI can rely on the latest electronic innovations to improve and speed up customer verification processes.

The amendments deal mainly with the verification of individuals, allowing the use of electronic and digital verification including proprietary software and/or programs and verification by digital, electrical, magnetic, optical, electromagnetic, biometric and photonic form. The amendments also set out factors which BVI institutions should take into account when relying on third party platforms in their verification processes and when determining the reliability and independence of electronic and digital data.

These amendments are timely given the increase in business models now relying on financial technology to conduct their operations and they also support the introduction of the new micro business company. Please see our recent alert for more details on these changes.

Harneys has worked closely with the BVI government in developing these new laws and structures and we are delighted that the jurisdiction has been able to introduce so many new initiatives despite the challenges that Hurricane Irma brought on last year. It is a true testament to both the resilience and forward thinking nature of these islands.

Please contact your usual Harneys contact if you would like more information or advice on any of these changes or if you have any other questions or visit harneys.com/BVI.

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Getting the Deal Through: Cayman Islands Ship Finance
Tue, 11 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/getting-the-deal-through-cayman-islands-ship-finance/
http://www.harneys.com/insights/getting-the-deal-through-cayman-islands-ship-finance/
Partners Ellie Crespi and Nicole Pineda discuss registration of vessels, ship mortgages, tax considerations and more in the latest Cayman chapter of Getting the Deal Through: Ship Finance. Download the PDF to read more.]]>
Termination and De-registration of Cayman Regulated Funds: Consider action now to reduce 2019 fees
Mon, 10 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/termination-and-de-registration-of-cayman-regulated-funds-consider-action-now-to-reduce-2019-fees/
http://www.harneys.com/insights/termination-and-de-registration-of-cayman-regulated-funds-consider-action-now-to-reduce-2019-fees/
Managers of Cayman Islands regulated funds who are reviewing whether to wind any funds down before the end of 2018 may want to act promptly to avoid or reduce the annual 2019 Cayman Islands Monetary Authority (CIMA) fees and related costs. Regulated funds which file their de-registration documents with CIMA before 31 December 2018 will not be liable to pay the 2019 CIMA fees, currently US$4,268 for a regulated feeder fund and US$3,048 for a regulated master fund. Funds may also save related service provider fees, including annual audit fees, once they have de-registered.

In what circumstances can a fund de-register from CIMA?

A regulated fund may de-register for various reasons, including where the fund:

is in voluntary liquidation

will be continuing as an “exempted” fund1 under the Mutual Funds Law or no longer meets the definition of a mutual fund, as it has become a single investor fund or become a closed-ended fund as its shares are no longer redeemable at the option of investors, or

has never carried on business or ceases carrying on business as a regulated mutual fund.

What is the process for de-registration?

There are various core requirements which must be met to de-register a fund from CIMA:

the fund must be in good standing with CIMA, having paid all fees due and submitted all filings required

the original registration certificate for the fund must be submitted together with a fee of US$730 and a certified copy of a resolution of the directors (for corporate funds) confirming the date the fund will cease or has ceased to carry on business as a fund in or from the Cayman Islands

Further documents must then be filed with CIMA depending on the reason for de-registering. Where a fund is going into voluntary liquidation these include filing the notice of the winding up and voluntary liquidator’s consent to act. Filing these documents with CIMA allows the fund to be placed in “Licence under Liquidation” status by CIMA so that, provided the filings have been made before 31 December 2018, no annual fees for 2019 will be payable to CIMA. If the fund is not in good standing with CIMA further documents may need to be submitted by the liquidator.

Funds which are de-registering for other reasons and which have filed some but not all of the required de-registration documents before 31 December 2018 can be placed in “Licence under Termination” status, which reduces their annual CIMA fees by 50 per cent.

Funds in either Licence under Liquidation or Licence under Termination status will be contacted by CIMA during the 6 months after the fund is placed in that status to follow up on any remaining documents and/or fees needed to complete the de-registration. Funds are also expected to provide CIMA with comprehensive updates on the status and progress of the winding down or liquidation within this 6 month period. CIMA will de-register funds that do not provide the information requested within the timeframe agreed.

If the fund is continuing to operate under an exemption from the Mutual Funds Law it will remain liable for the ongoing fees of its service providers and for annual Cayman Islands registry fees for companies, partnerships, trusts and LLCs, as appropriate for its structure.

Please contact us for details of the documents required for different types of de-registration.

Do we still have to appoint AML Officers?

Regulated funds which apply to terminate their registration by 30 September 2018 because the entity is ceasing to operate do not have to appoint anti money laundering officers (AML Officers) under the changes to the Cayman Islands anti-money laundering regime earlier this year.

Regulated funds which are applying to terminate their registration for other reasons, eg mutual funds which will continue as closed-ended funds, must still appoint AML Officers. Please see our client alert for more details on the obligations to appoint AML Officers.

Do we need an audit or can we get a waiver?

Unless a fund qualifies for an audit waiver, it will also have to provide audited accounts from the last financial year end for which audited statements have been filed as part of the de-registration process. CIMA may grant an audit waiver on an application by a fund which is being voluntarily liquidated where a third party liquidator has been appointed on terms which require a review of the period since the last financial year end, and in other limited circumstances. Please contact us for more details on CIMA’s policy on audit waivers.

Next steps

Please contact your usual Harneys contact for more information on how we can assist with termination of funds or if you have any other questions or visit harneys.com/cayman.

1An “exempted” fund under section 4(4) of the Mutual Funds Law is a fund whose equity interests (shares, limited partnership interests, interests of members of a limited liability company established under the Cayman Islands Limited Liability Companies Law (LLC), or units in a unit trust) are held by not more than 15 investors, a majority of whom are capable of appointing or removing the operator of the fund (directors for a corporate fund, general partner for a limited partnership, manager for an LLC or trustee of a unit trust).

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Estate Administration in the Cayman Islands
Thu, 06 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/estate-administration-in-the-cayman-islands/
http://www.harneys.com/insights/estate-administration-in-the-cayman-islands/
A grant of probate or letters of administration will be necessary when a person dies and leaves Cayman Islands assets in their individual name, such as money in a bank account or shares in a Cayman Islands company. The Succession Law (2006 Revision) (the Succession Law) provides that no person shall take possession of or in any manner administer any part of the estate of a deceased person unless he or she has first obtained from the Grand Court of the Cayman Islands a grant of probate of the will or letters of administration of the estate of such deceased person.

A grant is necessary so that persons or organisations holding money or other assets in the deceased’s name know who will be legally entitled to the asset(s). The grant is proof that the person named in it has a legal entitlement as executor or administrator of the estate of the deceased.

The Grant

The Succession Law and the Probate and Administration Rules (2008 Revision) (the Rules) provide for four types of grants:

Probate – issued to an executor or executors named in a deceased person’s will.

Letters of Administration with the will annexed - issued where there is a will, but no named executor or the executor has renounced because he or she does not wish to be involved in dealing with the estate.

Letters of Administration - issued because the deceased has not made a will or the will is deemed to be invalid.

Resealing of Foreign Grants - obtained where a grant of probate or a grant of letters of administration has been obtained through a court in a foreign country. Such grant of probate or letters of administration in respect of the estate of a deceased person may be sealed with the seal of the Grand Court of the Cayman Islands. On doing so, the foreign grant shall be of the like force and effect and have the same operation in the Cayman Islands as if granted by the Grand Court.

Timing

The application for probate or letters of administration of the estate of a deceased person must be filed within six months of the death or within two months of the termination of any dispute concerning the right to apply for probate or letters of administration.

If an application is made after the six month period, the applicant must first make an application to the Court for special leave to apply out of time.

The timing for receiving a Court sealed order is approximately four months from the time of submitting a complete and correct application.

Within one year after the grant of probate or letters of administration, a personal representative must file with the court accounts supported by affidavit showing receipts and distributions of the estate.

General Procedure for Applications

The required grant is obtained by a paper application to the Civil Registry of the Grand Court of the Cayman Islands and is reviewed on the papers by a Judge in Chambers. In other words there is no need for a hearing. It is not necessary for the executor/administrator to be physically present in the Cayman Islands to execute or submit the application.

The requisite documents will vary depending on the grant sought, but include:

Application for Special Leave

An application for special leave; and

An affidavit in support explaining the reason(s) for the delay in making the application.

Application for a Grant of Probate

An application for the grant of probate;

An affidavit in support of the application covering certain prescribed matters.

The original will or a court certified copy.

An official copy of the death certificate of the deceased.

Application for Letters of Administration with or without the will annexed

An application for the grant of letters of administration which includes a bond for double the amount of the sworn value of the estate (unless the court thinks fit to reduce the amount) with one or more surety or sureties.

An affidavit in support of the application covering certain prescribed matters.

An official copy of the death certificate of the deceased;

The original will or a court certified copy if the deceased died testate.

An Application for a Resealing of a Foreign Grant

An application for a resealing which, if it is in relation to a resealing of a foreign grant of administration, includes a bond for double the amount of the sworn value of the estate (unless the court thinks fit to reduce the amount) with one or more surety or sureties

An affidavit in support of the application covering certain prescribed matters.

A court issued copy of the foreign grant.

An official copy of the death certificate of the deceased.

An affidavit of foreign law in support of the application sworn by a lawyer, practicing in the country in which the foreign grant was issued, confirming that either (a) the will is valid under the laws of that country; or (b) the person appointed as administrator was validly appointed under the laws of that country.

Documents in a Foreign Language

Where documents such as the foreign grant, the death certificate or the will are not in English, a full certified translation of such documents must be submitted along with the original foreign language documents. The certification must be accompanied by a signed statement attesting that the translation is accurate and complete and to the best of the translator’s knowledge and ability.

Caveats

A person who wishes to ensure receiving notice of a grant prior to it being sealed may enter a caveat in the probate registry by completing a prescribed form and lodging it with the clerk of the probate court. The caveat is only valid for six months and will lapse automatically unless renewed.

Court fees

Court filing fees in respect of making an application are in the region of US$300.

An application for special leave, a grant of probate, letters of administration or a resealing of a foreign grant - US$243.90.

Any affidavit in support of the application - US$30.48.

Obtaining a copy of an order of the court – US$30.48.

Inventory or account – US$30.49.

Summary

The rules outlining the process for applying for a grant are technical, detailed and specific. Significant time delays will be incurred if an incorrect or incomplete application is submitted. Our Cayman Islands Private Client team has years of experience advising on and obtaining grants of probate and letters of administration.

As we set out in our earlier alert, all Investment Entities which are subject to the AML Regulations must designate natural persons as AML Officers. As made clear by updated AML Guidance Notes and notices issued by the Cayman Islands Monetary Authority (CIMA), AML Officers can be provided by an Investment Entity’s service providers. Harneys Fiduciary offers AML Officer services, additional information on our Compliance Outsourcing services can be found here.

What are the deadlines?

All Investment Entities that are now being formed must appoint AML Officers at the outset. For those Investment Entities that were already existing on 1 June 2018 the deadline for these appointments is 30 September 2018. In addition, all Investment Entities registered with CIMA (eg mutual funds or excluded persons under SIBL) must confirm the names of their AML Officers by making a filing on CIMA’s REEFS portal.

Investment Entities that are not CIMA registered (eg private equity funds) are not currently required to make any filings with any Cayman Islands authority regarding the details of their AML Officers.

CIMA registered entities which are terminating

An important point to note for CIMA registered Investment Entities is that, if they apply to terminate their registration/license by 30 September on the basis that the entity is ceasing to operate, they do not have to appoint AML Officers.

Investment Entities which are applying to terminate their registration/licence for other reasons, eg mutual funds which will continue as closed-ended funds, must still appoint AML Officers.

CIMA can impose substantial administrative fines for breach of the AML Regulations.

What should Investment Entities do to comply?

Investment Entities that have not yet made these appointments should:

identify and appoint suitable natural persons as AML Officers by 30 September 2018 and make any mandatory filings with CIMA

review their service provider agreements to make sure that the delegation of any function (eg investor due diligence to a fund administrator) and any reliance on others is addressed. Of particular note is the explicit requirement that AML policies and procedures must cover the business activities of the relevant entity (ie monitoring downstream investment activities) as well as customer due diligence, and

update their documentation and procedures regarding anti-money laundering compliance generally. For investment funds, CIMA has confirmed that it expects confirmation of the appointment of the AML Officers to be included in fund offering documents. The names of the individuals do not need to be disclosed.

Harneys’ investment funds and regulatory team is well versed in all aspects of the new requirements, so please contact your usual Harneys contact if you would like advice on compliance with the AML regime in Cayman or if you have any other questions or visit harneys.com/Cayman.

1Over and above being registered or licensed under any of Cayman Islands’ regulatory laws (including being registered as a mutual fund or an excluded person with CIMA), this now includes any entity which is ‘otherwise investing, administering or managing funds or money on behalf of other persons’ which is a much broader catch-all than previously existed in the Cayman Islands.

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New Procedure for Processing Executive Work Permit Applications
Mon, 03 Sep 2018 00:00:00 +0100
http://www.harneys.com/insights/new-procedure-for-processing-executive-work-permit-applications/
http://www.harneys.com/insights/new-procedure-for-processing-executive-work-permit-applications/
The BVI Government has introduced a new procedure for processing work permit applications for those persons earning or expected to earn US$100,000 or more per year with the aim of expediting the work permit application process.

The new procedure applies from 3 September 2018 and relates to the following types of work permit applications, provided the applicant meets the qualifying salary:

Full time work permit applications

Change of employer applications

Periodic work permit applications

Temporary work permit applications

Work permit renewal applications

The new procedure requires the submission of a scanned copy of the application and the required supporting documents by email to ewp@gov.vg. All payments should be made by way of cheque delivered to the Ministry of Natural Resources and Labour.

The anticipated processing times for work permit applications submitted under the new procedure are as follows, which includes completion of the relevant immigration process:

Full time, change of employer and periodic work permit applications: 12 business days

Work permit renewal applications: 5 business days

Temporary work permit applications: 2 business days

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INSOL World: A Cauldron of Fraud – AHAB v SICL & Ors
Fri, 31 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/insol-world-a-cauldron-of-fraud-ahab-v-sicl-ors/
http://www.harneys.com/insights/insol-world-a-cauldron-of-fraud-ahab-v-sicl-ors/
In a landmark ruling for the Cayman Islands jurisdiction, the Honourable Chief Justice Smellie of the Grand Court, on 31 May 2018, emphatically dismissed a multi-billion dollar claim in the case of Ahmad Hamad Algosaibi & Brothers Company (AHAB) v SICL & Ors, involving allegations of fraud arising from one of the largest corporate collapses of the financial crisis. This case rivalled, if not surpassed in respects, the notorious Madoff Ponzi scheme which was also uncovered during the financial crisis, and has been described, both in terms of length and value, as the most substantial trial ever to be heard in the Cayman Islands. This article looks at the global scope of the dispute which led to the Cayman judgment. Download the PDF to read more.]]>
Getting the Deal Through: British Virgin Islands Fund Management 2018
Wed, 29 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/getting-the-deal-through-british-virgin-islands-fund-management-2018/
http://www.harneys.com/insights/getting-the-deal-through-british-virgin-islands-fund-management-2018/
Ayana Hull gives an overview of fund management in the British Virgin Islands including regulations, fund marketing and current trends within the jurisdiction in the latest BVI chapter of Getting the Deal Through: Fund Management 2018. Download the PDF to read more.]]>
Regulatory sandboxing in the British Virgin Islands
Mon, 27 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/regulatory-sandboxing-in-the-british-virgin-islands/
http://www.harneys.com/insights/regulatory-sandboxing-in-the-british-virgin-islands/
The concept of regulatory sandboxing was discussed at the Meet the Regulator Forum early in 2018 and in an article published in BVI Finance.

On a global scale, the regulatory environment has seen various changes recently with the introduction of various streams of technology and products. With these changes, comes the demand to keep innovating and developing new ideas and products relevant to the financial services market. One prime example that is at the forefront of most regulatory discussions now is the issue of FinTech. This new up and coming area of regulation would be an ideal fit for the concept of a regulatory sandbox. The regulatory sandbox is a product that is designed by a regulator that would seek to allow persons who are interested in exploring new and innovative areas to test regulatory products in a controlled environment whilst being supervised and monitored by a regulator in a ‘light touch’ regulatory environment and market.

What is the purpose of the regulatory sandbox?

The primary purpose of the regulatory sandbox would be to:

provide innovators of small start up business with some support to navigate the regulatory system, to reduce the barriers to innovation while maintaining the same standards of regulation and consumer protection; and

increase the range of regulatory products and services that a BVI business company can offer as it is anticipated that there would be significant interest in FinTech firms choosing the BVI as their new domicile of choice.

Key drivers for a regulatory sandbox include facilitating innovation and competition and the concept has proven popular and used in widely accepted common law jurisdictions such as the United Kingdom, Jersey, Hong Kong, Singapore, Australia, Canada and Malaysia. Other Commonwealth countries have explored the concept and welcomed it in various regulated sectors.

The regulatory sandbox as relevant to the BVI

The regulatory sandbox can act as a safe space for BVI business companies to test new ideas without incurring all of the normal regulatory consequences all the while remaining under the supervision and monitoring of the Financial Services Commission (the FSC) and its sister regulators. Opening a regulatory sandbox would be innovative. Innovation brings greater competition. Competition in turn will mean better outcomes for customers who are willing to use the product and this in turn will have real economic benefit for the BVI.

The ideas of technology and innovation were key parts of “BVI on China’s Belt and Road” message. Nominal form registration of this new type of regulatory innovation or proposed safe-harbour within the regulation will allow the FSC to have a greater insight on who are interested in the product i.e. who are using it, how popular the product is, who might the contact persons be.

The general test that is required to be fulfilled in getting entry into the sandbox is that the product is innovative, the product will benefit consumers and the applicant has considered and will put in place appropriate safeguards to manage risk and protect consumers. On this basis, having light touch regulation or exemptions in place will stimulate a new growth in regulated business where otherwise there was none or clients were opting to benefit from statutory safe-harbours through technical restructuring, the light touch registration of this new line of business will be a benefit to customers as they will have another option when compared to very heavy licensing and regulatory obligations and having the FSC as a prime regulator in place will afford protection to customers.

The regulatory sandbox is helpful for parties who want to launch their business to the market but are grappling with the regulatory uncertainty and complications involved with full form licensing. The concept will, through nominal regulation allow for access to information exchange between industry and the regulators allowing both parties to gain information on underlying businesses and further develop the thinking in this new up and coming area of law and regulation.

Utilising the sandbox approach will offer applicants strong potential opportunities to engage with regulators who in turn may use their increased insight and knowledge to create a more favourable environment for applicants.

The benefits sandboxes could provide firms may also lead to better outcomes for consumers through a range of products and services at reduced costs and improved access to financial services markets that they would otherwise may not have been able to access.

The current position in the BVI

At present, there is no legislation in place to establish a regulatory sandbox but it is an issue that the FSC is actively engaged with and looking into.

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Getting the Deal Through: Cayman Fund Management 2018
Thu, 23 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/getting-the-deal-through-cayman-fund-management-2018/
http://www.harneys.com/insights/getting-the-deal-through-cayman-fund-management-2018/
Daniella Skotnicki discusses compliance and regulations of various types of funds in the Cayman Islands, including updates and current trends in the recent Cayman chapter of Getting the Deal Through: Fund Management 2018. Download the PDF to read more.]]>
Change in the BVI FSC’s policy towards listed subsidiaries of trust companies and company managers
Tue, 21 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/change-in-the-bvi-fsc-s-policy-towards-listed-subsidiaries-of-trust-companies-and-company-managers/
http://www.harneys.com/insights/change-in-the-bvi-fsc-s-policy-towards-listed-subsidiaries-of-trust-companies-and-company-managers/
The FSC has recently clarified that subsidiaries of licensed trust companies and company managers in the BVI will no longer be permitted to undertake registered agent and registered office business in or from within the BVI. Licensees have until June 2019 to comply with the proposed changes.

The current form of the Banks and Trust Companies Act 1990 (BTCA) and the Company Management Act 1990 (CMA) allows for licensees to incorporate and operate subsidiaries and for these subsidiaries to be included on the parent company’s licence. The BVI Financial Services Commission (the Commission) has decided that the listing of subsidiaries on a parent company’s licence will no longer be allowed and that all subsidiaries that are currently listed on their parent company’s licence must be removed. The Commission is likely to change this position soon, as a result of the following:

the various financial services legislation does not expressly provide for subsidiaries to comply with regulatory obligations including the requirement to seek prior approval for certain changes, e.g. changes in ownership and the appointment of directors;

the FSC has communicated that it has encountered resistance from some licensees who maintain that the subsidiaries are not licensees and do not need to comply with the regulatory obligation;

the FSC asserts that authorising subsidiaries to provide services such as registered agent services is contrary to the BVI Business Companies Act 2004; and

there is an on-going need for the FSC to explain to international financial examiners why there are more registered agents than licensees – which is because subsidiaries, which do not hold their own licence, are authorised to provide registered agent services.

There is a regulatory concern that the FSC does not have full regulatory oversight of entities that it has authorised to conduct regulated business. In order to address this concern, the FSC ceased approving subsidiaries to act as registered agents and amended the Financial Services Commission Act 2001 to enable the FSC to take enforcement action against subsidiaries.

As a result of the above, it is likely that the BTCA, CMA and other subsidiary legislation will likely be amended in the very near future.

In the meantime, the following options are available and will need to be complied with:

the FSC has decided that listing subsidiaries on a licensee’s licence will no longer be allowed

all subsidiaries that are currently listed on licences will need to be removed;

the subsidiaries have the following options:

obtain their own licence; and

merge with the parent licence; or

liquidate the subsidiary.

We would highlight that while the FSC have written to licensees requiring that action be taken to remove the subsidiaries from the main licence. It is unclear, at this stage, what status the correspondence has in law and whether the licensee would be subject to any possible enforcement action if the licensee failed to take the requisite action by the deadline.

Please do feel to get in touch with any member of the Harneys Regulatory practice group should you require any assistance on this new policy.

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The position and rights of secured creditors in a Cayman liquidation
Thu, 16 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/the-position-and-rights-of-secured-creditors-in-a-cayman-liquidation/
http://www.harneys.com/insights/the-position-and-rights-of-secured-creditors-in-a-cayman-liquidation/
While secured creditors are usually better off than unsecured ones, they can face a number of pitfalls as a result of much-overlooked Cayman law, warn partner Nick Hoffman and senior associate Katie Pearson from Harneys in Grand Cayman.]]>
Expertise on Cyprus Fund Management
Tue, 14 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/expertise-on-cyprus-fund-management/
http://www.harneys.com/insights/expertise-on-cyprus-fund-management/
Discover the ins and outs of fund management in Cyprus, including regulations and current trends, in the latest edition of Getting the Deal Through: Fund Management 2018. Download the PDF to read more. ]]>
CySEC Announces the launch of a FinTech and RegTech Innovation Hub in Cyprus
Tue, 14 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/cysec-announces-the-launch-of-a-fintech-and-regtech-innovation-hub-in-cyprus/
http://www.harneys.com/insights/cysec-announces-the-launch-of-a-fintech-and-regtech-innovation-hub-in-cyprus/
The Cyprus Securities and Exchange Commission (CySEC) issued an announcement on 27 July 2018 regarding the establishment of an Innovation Hub in Cyprus aiming to keep track of developments in the FinTech and RegTech industries and promote communication between all relevant stakeholders. This update outlines relevant details about this exciting new project as well as the EU-led initiatives that made it possible.

The launch of a new Innovation Hub

The Cyprus Innovation Hub, which is intended to become operational in September 2018, has been designed to permit supervised and non-supervised entities in innovative or new FinTech industries to acquire ongoing access to CySEC staff and resources. It is intended that the platform will enable entities to comprehend and consequently implement applicable regulatory requirements that may be relevant to the products they seek to bring to the market.

In its announcement CySEC highlighted that FinTech entities will be able to gain access to specialised regulatory expertise, industry and academic roundtables (a copy of the announcement is here.) They will have the ability to revert to CySEC with relevant feedback, pointing out any risks and also the benefits of these new innovative investment products and platforms, using Distributed Ledger Technology (DLT), ie blockchain. In turn this will influence CySEC’s decision making process and simultaneously furnish CySEC with the opportunity to cultivate rules and regulations which are more suitable, accurate and up to date.

As mentioned by the chairwoman of CySEC Demetra Kalogirou, “The establishment of the Innovation Hub marks an important and exciting step for CySEC’s supervision of new and innovative FinTech companies in Cyprus. In promoting closer ties with these fledgling but fast-growing industries, we aim to best protect investors by fully understanding the risks and benefits these new products bring.”

More details are due to follow from CySEC soon as regards the precise aspects and qualifying terms for the project.

Cypriot and EU FinTech initiatives

The Innovation Hub has been drawn up following close cooperation between CySEC and other competent authorities in Cyprus including the Central Bank of Cyprus and the Ministry of Finance. Harneys have, from the outset, been actively involved with these authorities and other stakeholders in Cyprus with a view to assist the jurisdiction, tapping into the considerable interest from regional industry players keen to set up crypto and FinTech businesses on the island.

At the same time, and in light of Cyprus’ position as a member state of the EU, it is clear that the Innovation Hub draws considerable inspiration from programmes and initiatives pursued by institutions at EU level. Chief among these programmes has been the EU’s FinTech Action Plan, announced by the European Commission in March 2018.

Under the Plan the Commission has acknowledged the rapid advances of FinTech and RegTech technologies, which in turn has led to significant structural changes in the financial sector. Equally it has been noted that a key risk is the possibility of excessively rigid regulatory frameworks in the EU which in turn may lead to a risk of “undesired outcomes”. Further, the European Supervisory Authorities (ESMA, EBA and EIOPA, collectively the ESAs)[1] have been looking to revise the suitability of regulatory frameworks in an attempt to assess developments; mitigate risks and enhance security and integrity of emerging technologies in the aforementioned sector.

Europe’s 23 Step FinTech Action Plan

Within the Action Plan the European Commission has set out 23 steps to encourage in a safeguarded manner the adoption of new FinTech solutions, and encourage innovation in the financial sector for the benefit of EU economy, citizens and industries.

The key recommendations, as outlined by the Commission in its press release of March 2018, comprise the following:

Urging the ESAs by Q1 of 2019 to record their supervisory practices and authorising approaches for innovative FinTech business models which will enable the Commission to supervise same and consider on the issuance of relevant guidelines;

Establishing an expert group to assess any unjustified regulatory obstacles to financial innovation in the financial services regulatory framework;

Establishing an EU FinTech Laboratory where, according to Valdis Dombrovskis, European and national authorities will engage with tech providers in a neutral, non-commercial space.[2]

Establishing an EU Blockchain Observatory and Forum aiming to assess on the challenges presented by crypto assets and distributed ledger technology and record the strategies to advance new developments in cloud computing and artificial intelligence.

Launching a blueprint with best practices on regulatory sandboxes, based on relevant guidance from the key competent ESAs;

Proposing the issuance of an EU Regulation on investment-based and lending-based crowdfunding service providers (ECSP) for business aiming to set a proportionate framework allowing crowdfunding platforms to function cross-border under an a unified passporting regime;

Other initiatives announced include a consultation on the digitisation of regulated information published by listed companies on EU regulated markets (by Q2 2018); and the creation of workshops to develop information-sharing of cybersecurity.

Across Europe, the Commission noted that 13 member states have established ‘FinTech facilitators’, being either innovations hubs or ‘regulatory sand-boxes’ (as at March 2018). Cyprus has now added itself to that growing collectivity.

Food for thought

The FinTech Action Plan in many ways is similar to the action plans established by the EU under their “Lamfalussy Process” which in turn led to seminal components of pan-EU regulation, comprising MiFID[3] and the creation of the European Security and Markets Authority. In our view, and in light of the rapid development of FinTech in numerous industries, as well as a number of diverse approaches taken at member state level, it seems that we are at a similar cross-road in European legislative development.

Harneys’ Role

Harneys actively engages in the area of Financial Technology and Innovation and advises some of the world’s top institutions in the jurisdictions we cover, including Cyprus. We welcome the formation of the Innovation Hub in Cyprus as an exciting step which we hope will foster more effective regulation and the provision of assistance and advice to prospective clients actively engaged in this industry.

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BVI regulator updates the AML and KYC regime for the Fintech era
Thu, 09 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/bvi-regulator-updates-the-aml-and-kyc-regime-for-the-fintech-era/
http://www.harneys.com/insights/bvi-regulator-updates-the-aml-and-kyc-regime-for-the-fintech-era/
The BVI Financial Services Commission (FSC) has amended the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (the AMLCode), effectively the financial services industry’s rulebook for customer verification and KYC, so that credit and financial institutions based in the jurisdiction may now rely on the latest electronic innovations to expedite customer verification.

On 19 July 2018 the AML Code was amended by the Anti-Money Laundering and Terrorist Financing (Amendment) (No. 2) Code of Practice, 2018 following consultation with the Joint Anti-Money Laundering and Terrorist Financing Advisory Committee (JALTFAC). The amendments came into force as of 1 August 2018.

Electronic verification clarified

The recent amendments deal mainly with the verification of individuals. Section 23 of the AML Code governs the general verification of customers, termed ‘applicants for business’ by BVI entities or professionals (each a BVI institution). The section has been amended to specifically permit the use of electronic and digital means of verification.

The AML Code now expands the ways a BVI institution may carry out verification procedures, whether in physical ‘wet ink’ paper form or by electronic and digital means. This verification process may include the use of proprietary software and/or programme by a BVI institution to conduct electronic/digital verification – including verification by digital, electrical, magnetic, optical, electromagnetic, biometric and photonic form.

A BVI institution relying on this type of verification, must ensure that it engages in an cyclical monitoring process (at least every three years) to keep track of any changes in the stipulated conditions or to satisfy itself as regards compliance or non-compliance with the stipulated conditions, and to act accordingly.

The new rules also stipulate circumstances in which a BVI institution should not rely on electronic/digital records, including but not limited to circumstances where the relevant information contained in the record is not capable of being displayed in a legible form, the electronic/digital record appears to be damaged, altered or incomplete, or where an electronic/digital signature or other kind of authentication accompanying or included with the electronic/digital record appears to be altered or incomplete.

Reliance on third party platforms

The new rules clarify that BVI institutions that carry out verifications relying on the electronic, digital or other data of an organisation, should ensure that they are independently established and that they use and access an extensive range of accurate and reliable information sources (generating both positive and negative information) which could link a customer to current and historical data.

In an interesting twist to the on-going data harvesting scandals plaguing both the US and EU markets at this time, the organisation being relied upon must be clear of any criminal offence or otherwise being sanctioned for breach of data or providing misleading data and the organisation must also be independent of the person to whom the verification relates (in terms of the collection, administration and management of data).

The amendments to the AML code contain other factors which BVI institutions should take into account when determining the reliability and independence of electronic and digital data. These expansive provisions are welcomed and are largely consistent with recent guidance issued by the UK Joint Anti-Money Laundering Steering Group (JMLSG) following amendments to the UK AML regime in late 2017. In light of this, the financial services industry would expect the market leading KYC verification tools adopted by global banks and other institutions to be suitable for the revised BVI requirements.

Non-face to face meetings clarified

The amendments clarify that in the case of electronic or digital verification or identity in relation to a transaction which is not held ‘face to face’, a BVI institution need not automatically treat an applicant for business or a customer as high risk.

The BVI institution need only treat such a customer as high risk in circumstances where it is satisfied that the applicant for business or customer presents a high risk or is otherwise engaged in money laundering or terrorist financing. Explanatory notes issued alongside the revised rules contain additional commentary dealing with further methods of verification in order to check against fraud and other criminal behaviour.

Certified documents

Under the old rules KYC documents such as passports and utility bills would need to be appropriately certified by designated professionals such as lawyers. Such certifiers would be required to attest, in general terms, that the copy resembled the original. Under the amended rules, in a move to bring the BVI closer in line with other reputable jurisdictions such as the UK, it is now acceptable for BVI institutions to rely on copies where they conduct an appropriate risk assessment.

Reflections in light of fintech and blockchain innovation

The amendments are timely considering the shift in many business models now relying on financial technology to conduct operations. The technology to support or enable financial services is now one of the fastest growing industries in the world. As online financial transactions occur more quickly, more efficiently and more cost effectively, more and more clients are readily embracing these on-line based products.

It is acknowledged that the fintech world continues to explode and cryptocurrencies and digital tokens continue their energetic movement through the world’s investment markets. The BVI therefore need to keep pace with developments in this space in order to attract and service clients who call upon the strong financial services community in the BVI to structure these new and innovative digital products. In establishing itself as a leader in offshore financial services and maintaining its integrity as a world-class jurisdiction, the BVI continues to examine and amend existing legislation to ably facilitate these developing digital trends. Creating digital flexibility in its AML regime achieves this goal and allows the BVI to meet customer needs in this fintech era whilst it continues to offer new and innovative products to include the new micro business company; and at the same, balance its international obligations in the fight against fraud and other financial crimes.

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Embracing the Shift: BVI and the Digital Movement
Thu, 09 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/embracing-the-shift-bvi-and-the-digital-movement/
http://www.harneys.com/insights/embracing-the-shift-bvi-and-the-digital-movement/
The use of computer programs and other technology to support or enable financial services is now one of the fastest growing industries in the world. As online financial transactions occur more quickly, more efficiently and more cost effectively, more clients are readily embracing these on-line based products. As the FinTech world continues to explode, so too must the BVI keep step with developments in this space in order to attract and service clients who call upon the strong financial services community in the BVI to structure these new and innovative digital products. Download the PDF to read the full article from the BVI Finance July 2018 issue of Business Insight.]]>
Cypriot competent authorities comment on US-Russia Sanctions
Fri, 03 Aug 2018 00:00:00 +0100
http://www.harneys.com/insights/cypriot-competent-authorities-comment-on-us-russia-sanctions/
http://www.harneys.com/insights/cypriot-competent-authorities-comment-on-us-russia-sanctions/The Cyprus Securities and Exchange Commission (CySEC), the Cyprus Bar Association (CBA) and the Institute of Certified Public Accountants of Cyprus (ICPAC) have all issued circulars recently reminding supervised entities about the relevance of recent US sanctions imposed against Russian individuals, companies, enterprises and officials.

The key competent authorities regulating the financial and professional services industries in Cyprus have recently reminded members and supervised entities of the importance and relevance of the US sanctions regime on Russia. Cyprus is, of course, not under US jurisdiction and as an EU Member State complies with the Union’s Common Foreign and Security Policy rather than US sanctions. As such the commentary provided is unusual but nevertheless remains helpful as a reminder to Cypriot businesses of the extra-territorial reach of US sanctions in certain circumstances.

The circulars from CySEC, the CBA and ICPAC (the Cypriot Competent Authorities or CCAs) urge regulated entities to thoroughly study the provisions of the sanctions implemented under the Countering America’s Adversaries Through Sanctions Act 2017 (CAATSA), including the Specially Designated Nationals (SDN) list which was released by the US Department of the Treasury’s Office of Foreign Assets Control (OFAC) on 6 April 2018. It should be recalled that, within the legal framework of CAATSA, the US Treasury included in its SDN list 7 prominent high net worth Russian businessmen, 17 Russian government officials and 14 companies in response to alleged “worldwide malign activity”. In summary, the US regulatory framework forbids US persons from transacting with these individuals and entities and mandates the freezing of all of their funds and economic resources. Moreover, the US may impose ‘secondary sanctions’ on non-US persons which ‘facilitate significant transactions’ with targeted individuals and entities.

The CCA circulars urge members firms to:

thoroughly and meticulously study the sanctions imposed by the US government, including the SDN list, and assess the extent to which these measures affect themselves, their firms and their clients;

assess the risks they may assume in the eventuality of involvement in any significant transaction or facilitation to carry out such a transaction, with any person subject to the sanctions; and

assess with rigour the risks associated with any new clients and the measures that will need to be adopted, including avoiding the commencement of any business relationship with the client.

Finally, as a reminder, the CCAs request firms to carry out the due diligence that they are legally obliged to undertake under Cypriot law and to regularly update their client records and compliance policies to comply with the latest developments in this area.

Harneys advises some of the world’s top institutions on the extent of EU and other sanctions regimes in the jurisdictions we cover, including Cyprus. It is now more important than ever for firms operating in jurisdictions subject to sanctions (including Russia and Ukraine) to remain ahead of the curve and establish robust compliance policies and procedures which deal with the intricacies of these overlapping and different regimes in order to mitigate the significant risks which firms and their staff may be otherwise exposed to.

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Subscriptions in digital assets: what are the risks?
Thu, 26 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/subscriptions-in-digital-assets-what-are-the-risks/
http://www.harneys.com/insights/subscriptions-in-digital-assets-what-are-the-risks/
Daniella Skotnicki discusses the challenges investment funds face when accepting subscriptions in digital assets including compliance regulations and valuation difficulties in this article originally published by HFM Week in the Blockchain 2018 Special Report. Download the PDF to read more.]]>
Microbusiness Companies Act 2017: Good things come in small packages
Tue, 24 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/microbusiness-companies-corporations-act-2017-good-things-come-in-small-packages/
http://www.harneys.com/insights/microbusiness-companies-corporations-act-2017-good-things-come-in-small-packages/
Everybody knows what an offshore company is supposed to be – a corporate vehicle used by global businesses and wealthy individuals, which allows them a great deal of flexibility to do clever things with their assets, and is protected by confidentiality. But if that is what you think, then as Bachman–Turner Overdrive sang: You ain’t seen nothing yet.

This is because in June the British Virgin Islands enacted the Micro Business Corporations Act, legislation which will allow the BVI to offer corporate solutions to an unexpected segment of the business market: microbusinesses.

As set out in the law, BVI microbusiness corporations (or MBCs) are pretty much the polar opposite of the traditional image of an offshore company. True, they are exempt from BVI taxes and by design will carry on their microbusiness outside of the BVI (paying taxes where they operate), but that is about the limit of any similarity. MBCs are deliberately focused upon delivering the benefits of limited liability to micro businesses anywhere in the world, but especially in emerging economies. MBCs are affordable. They are simple. And they are completely transparent.

The value of microbusiness to both developing and developed economies is well documented. But whilst developments in microfinance, policy and regulation of micro enterprises are evolving, the same cannot be said of the corporate infrastructure. Accordingly, microbusinesses normally start as sole traders working in the informal economy, and at some point in their growth cycle needed to make the quantum leap to full incorporation within the regulated formal economy. The MBC is designed to bridge that gap.

The MBC, as established in the BVI’s new law, is a very simple and limited type of company. It is designed for limited ownership businesses with a turnover and asset value below US$2 million and businesses with 10 or fewer employees. The number of shareholders is also limited, and restricted to individuals. Those persons will be publicly identified as the owners, and the shares are non-transferrable and may not be encumbered.

The other key feature of the MBC is that it is heavily technology driven. The law envisions that the entire incorporation process, including KYC checks, can be done from a mobile phone. It is not, after all, terribly realistic to ask a farmer in rural Kenya to travel to Nairobi to have a copy of his passport certified by a notary, and then courier it to the BVI, and wait for his certificate of incorporation to get couriered back. Particularly when that farmer is already receiving crop and weather data and making and receiving mobile money business payments effortlessly on a smartphone. The whole process of couriering original documents back and forth to remote corners of the world is anachronistic – and will be obviated by the MBC platform.

Most microbusinesses fail within the first year – that is not dissimilar from other business startup models; that is the nature of capitalist enterprises. Accordingly, many MBCs are likely to have a short life. However, for those businesses which do succeed, the undertaking and assets of the business are already held within a corporate structure which can then be easily transformed into a fully-fledged company when the business is ready to take that next step – be it to bring in outside investors, or in relation to a merger or acquisition, or whatever it may be. And for the businesses which fail, having the protection of limited liability allows the business owner some protection for his or her personal assets and greater opportunity to marshal their ideas, learn from their mistakes and try again.

One of the underrated contributions of the offshore world is acting as conduits for capital inflows in the developing world for large infrastructure projects. Hopefully MBCs will provide a complementary service to the business infrastructure in those countries to help entrepreneurs take that first crucial step on the business ladder.

The technology platforms which will make the MBC Act practical are expected to come online later in 2018. It will be interesting to see how the market responds to the BVI’s latest innovation, and whether delivery and distribution matches the promise of the product.

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Management of small- to mid- sized offshore funds in Cyprus
Fri, 20 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/management-of-small-to-mid-sized-offshore-funds-in-cyprus/
http://www.harneys.com/insights/management-of-small-to-mid-sized-offshore-funds-in-cyprus/
Following certain tectonic shifts in EU law regulation, implemented locally as of 2018, Cyprus is now an ideal location for regional fund managers to set up shop quickly and cost-effectively to manage small- to mid-sized offshore funds, such as those domiciled in the Cayman Islands and the British Virgin Islands. In this article, originally featured in HFM, Aki Corsoni-Husain and Elina Mantrali, outline why Cyprus is an optimal domicile for regional managers to conduct business within.]]>
Snapshot of the benefits of the Limited Partnership Act 2017
Tue, 17 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/snapshot-of-the-benefits-of-the-limited-partnership-act-2017/
http://www.harneys.com/insights/snapshot-of-the-benefits-of-the-limited-partnership-act-2017/
Harneys recently had the pleasure of announcing that our British Virgin Islands office had re-registered itself under the Limited Partnership Act 2017 to take advantage of a number of the provisions in the new legislation. In that announcement we referred to some of the advantages of registration under the new legislation (apart from the obvious benefit of limited liability structures).

The Limited Partnership Act 2017 is the culmination of many years of effort by the British Virgin Islands legal community to fundamentally reform the law relating to limited partnerships in the Territory. Although reform efforts were directed towards investment funds, the structures also provide a number of advantages for other types of business – including the law firms themselves.

Although limited partnerships under the 2017 Act retain a number of the key features of partnerships, in many other respects they closely resemble limited liability companies, including the ability to opt for separate legal personality for the partnership.

Many of the most attractive features of limited partnerships under the 2017 Act are provisions which consciously replicate concepts of company law. A lot of these are simple and basic, like the ability to obtain a certificate of good standing for the partnership and setting out clear provisions for execution of documents. But others are more complex and detailed, including:

a new registration regime for security interests created by the partnership to protect priority and give constructive notice to third parties;

the ability to enter into plans and schemes of arrangement between the partners and/or creditors of the partnership;

the ability to continue limited partnerships into and out of the British Virgin Islands;

the ability to merge or consolidate limited partnerships by statutory process; and

minority squeeze out provisions.

Whilst most of these concepts draw heavily upon equivalent provisions of BVI company law, there are subtle changes of emphasis and degree.

But other parts of the legislation simply seek to refine and improve on the predecessor legislation relating to limited partnerships, clearing away old problems and filling in gaps. Notable improvements include provisions for transfer of partnership interests, and accession to the limited partnership agreement. No longer will parties have to grant general powers of attorney to the general partner to sign accession agreements every time a new investor invests into a fund structured as a limited partnership. The long standing lacuna in BVI partnership law in relation to struck-off partnerships has finally been resolved.

Insolvency practitioners will also be heartened to see express provision made for dealing with insolvent partnerships. The Insolvency Act 2003 required subsidiary legislation to deal with partnership generally, but much like the theatrical play, Waiting for Godot, these regulations seemed destined never to arrive. Now – for limited partnerships at least – there are sensible provisions for dealing with financially distressed partnerships.

When the partners decided to re-register under the 2017 Act there was some hope that Harney Westwood & Riegels LP would be the first limited partnership to be registered under the 2017 Act. Sadly that did not happen – our investment funds team were too busy with forming new PE structures and managed to register 13 of them before we managed to register our own firm. But we were very pleased to complete our registration nonetheless, and look forward to joining our clients in enjoying the benefits of the new legislation.

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China’s Belt and Road Investment in Africa and the Use of Offshore Finance
Wed, 11 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/china-s-belt-and-road-investment-in-africa-and-the-use-of-offshore-finance/
http://www.harneys.com/insights/china-s-belt-and-road-investment-in-africa-and-the-use-of-offshore-finance/
The “Belt and Road” initiative (BRI) is a trade and infrastructure development strategy instigated by the Chinese President Xi Jinping in 2013 to convert what was once known as the Silk Road to a modern trade and economic cooperation project spanning 71 countries. Primarily using bilateral loans distributed by state sponsored banks and credit funds, China pledged US$60 billion in 2015 to aid development in the African industrial, agricultural, energy and infrastructure sectors.[1] In May 2017, China further executed an economic and trade cooperation agreement with 30 countries including Kenya and Ethiopia at the first Belt and Road Forum.

It is impossible for China to fund the entire BRI and as such private investors play a major role in the initiative. A large portion of the current African BRI projects have been funded through public- private partnerships. There have also been numerous private equity funds set up to invest in BRI projects, including General Electric which pledged US$1billion to finance African infrastructure development in the power, healthcare and railway sectors.[2] Apart from direct investment into the BRI projects, other consequential bankable opportunities also become available to private investors. For example, an industrial park near Nairobi in Kenya is anticipated to be built by a private Chinese developer to benefit from the new rail links developed under the BRI. These Chinese investors are often assisted with reputable local partners to manage risks and operations locally.

Due to their international reputation as commercially accepted investment vehicles benefiting from stable legal systems based upon English common law, offshore entities, particularly BVI and Cayman SPVs, are the most effective platform to enable businesses to benefit from Africa’s BRI-supported economic development. A broad range of BVI and Cayman vehicles are suitable for investments in Africa depending on the business objectives of the investors. Joint venture vehicles can be set up by a combination of foreign investors, domestic African investors or a mix of foreign and domestic African investors. Depending on the specific capital and investment requirements of the business, other relevant vehicles include private equity funds, open-ended funds, permanent capital vehicles, and segregated portfolio companies.

Offshore vehicles are beneficial for private investors’ participations in the BRI. The major concerns that limit private funding are fund management transparency and the framework of the cross-border regulations. BVI and Cayman vehicles can tackle these concerns head-on as they are governed by progressive and flexible legislation and dispute resolution regimes that have evolved with a predominate focus to facilitate cross-border financing and investment transactions. These regulatory frameworks have been tried and tested channels for the flow of foreign direct investment (FDI). The skill set, expertise and professionalism occasioned by the deep pool of lawyers and service in both BVI and Cayman can also achieve transaction fluency in an efficient, rapid and cost effective manner.

Africa’s significant infrastructure gap continues to define the continent as the largest FDI hub in the world. On 28 June 2018, Afework Kassu, Ethiopia’s State Minister of Foreign Affairs commented that the BRI boosts Africa’s economic growth and development and is important in closing its annual infrastructure gap of US$95 billion.[3] It was forecast on 4 July 2018 by the Global Infrastructure Hub, a G20 Group initiative, that US$621 billion investment by 2030, and a total of US$2 trillion between 2018 and 2040 is necessary to meet the demands of Africa’s growing populations and economies.[4] It is estimated that if the current foreign investment trajectories continue, Africa will experience a 40 per cent shortfall in the necessary funding.[5] This latest forecast clearly underscores the importance of the BRI to the sustainability of Africa’s economies.

Since 2016, FDI into Africa has been experiencing an annual decline.[6] Although the US has traditionally been the largest FDI provider in Africa, in light of Trump’s “America First” strategy the global expectation is that the US will significantly reduce its foreign aid programs, at least in the short-term; the BRI has thus become the next most viable source of FDI.[7]

The BRI aims to aid Africa’s recovery from the commodity price collapse in 2014 and focus on economic sustainability, instead of short term high returns. This is important to Africa which is predicted to have 25 per cent of its population under 30 by 2050. Africa targets economic growth and stability through industrialisation, agriculture modernisation, infrastructure, financial services, poverty reduction and public health and welfare.[8] Forty per cent of current funds injected by China into Africa have been used for power generation and transmission, which is important to a continent where more than 600 million people have no access to electricity, whilst a further 30 per cent were used to modernise Africa’s transport infrastructure.

BRI contributions made to Africa have driven numerous cross-continental infrastructure projects including aviation, railways, high speed train network and aviation. The hotspots of China’s support in Africa are Egypt, Djibouti, Ethiopia, Angola, Zambia and Tanzania. Of all the African countries, Kenya’s involvement in the BRI is by far most significant as East Africa is BRI’s main focus in the continent.[9] One of the most noticeable outcomes of the BRI in 2017 is China’s US$6.3 billion credit in funds to East Africa to develop the Nairobi-Mombasa Railway in Kenya which will extend from Mombasa in Kenya to Rwanda via Uganda, and may potentially stretch to Burundi and DR Congo.[10] This would open previously less connected countries which are rich in agriculture and resources, such as Rwanda, to the rest of the world.

China has become Africa’s biggest trading partner since 2016. According to statistics from China Customs, although the China’s exports to Africa in January 2018 decreased by 4.7 per cent year on year to US$8.1billion, imports of Africa increased by an impressive 41.4 per cent year on year to US$8.8billion.[11] This is promoted through the infrastructures and trade developments under the BRI, which will inevitably accelerate the African economic development in the long run.

One of the major risks that BRI poses to Africa is the potential default risk of mushrooming repayments of loans; a precedent can be seen in Sri Lanka.[12] Between 2000 and 2015, China has lent a least US$95.5 billion to Africa, mainly for the purpose of financing Africa’s infrastructure gap.[13] Nonetheless, it is undisputable that the funds from BRI have been used to maximise Africa’s economic development and stability.

Going forward, there is no reason to think that China will change its trend of significant funding and investment in Africa in the foreseeable future. The BRI has clogged Africa’s historical problem of infrastructure deficit and prompted economic growth by inland-bound developments from the coasts of Africa. The business developments promoted by the BRI have also boosted the employment opportunities for locals as well as the competitiveness, technological development and productivity of Africa. The BRI has given developing countries, including the African countries, a voice in the global economy and created prosperity and employment opportunities.

Harneys has for many years worked together with the leading law firms in Africa (as well as law firms outside of Africa) advising on the offshore aspects of African investment transactions. Of the jurisdictions we advise on, BVI and Cayman vehicles are the most suitable investment routes in Africa focused transactions, as investors can benefit from the progressive, commercial focused and flexible legislation as well as credible and efficient exit strategies. Harneys is at the forefront of advising on the use of BVI or Cayman capital structures to achieve investor’s business objectives and our knowledge and experience extend well beyond the use of offshore as a conduit of FDI in Africa.

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CIRC Promotes Foreign Private Equity Participation in Restructurings
Mon, 09 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/circ-promotes-foreign-private-equity-participation-in-restructurings/
http://www.harneys.com/insights/circ-promotes-foreign-private-equity-participation-in-restructurings/
On 29 June 2018 the China Insurance Regulatory Commission (CIRC) issued its Administrative Measures for Financial Assets Investment Companies (Trial) (the Measures). The overall gist of the Measures is to bring about deleveraging and meaningful restructuring of indebted companies (both balance sheet and operational). To achieve this goal, the CIRC wants domestic banks to be shareholders of financial asset investment companies, and will also allow any proportion of foreign investor participation.

The declared aims of the Measures include ensuring that financial asset investment companies acquire non-performing assets (NPAs) by means of true sales. The CIRC laid out several examples of transactions for criticism because they are sham transactions or otherwise provide recourse to sellers of NPAs, which in the CIRC’s view would both fail to lead to genuine restructuring of viable enterprises and possibly bring NPAs back onto the balance sheet of the domestic bank that sold the NPAs. In setting out its policy goals, the CIRC expressly mentions the need for genuine restructurings of viable enterprises and not zombie companies. The Measures also require comprehensive risk management and risk isolation in the sector and capital management to be done to professional standards. The CIRC’s expectation is that, cumulatively, the Measures will reduce leverage in the Chinese economy by providing a route to restructuring and work-outs. The Measures are timely, given that Bloomberg reported this week that year-to-date defaults on corporate bonds in China are running at 75 per cent of the total defaults in 2017.

A spokesperson for the relevant department of the CIRC reportedly issued a statement that, “in line with the spirit of opening up to the outside world, the Measures impose ‘national treatment’ on foreign-invested institutions investing in financial asset investment companies, and there is no restriction on the proportion of foreign ownership.” In previous cycles of China’s distressed debt market, some foreign investors in distressed debt have expressed concerns that they were effectively limited to participating only in the least-marketable niches of the market. Because the Measures require financial asset investment companies to be established by domestic commercial banks as major shareholders, but do not require commercial banks to control such companies, and given that there is now no limit on the proportion of foreign ownership, the way may be opened for more meaningful participation by foreign investors in restructuring and work-outs.

The Measures also clarify that a number of funding options are available to financial asset investment companies, including (1) raising funds from qualified investors and using private equity asset management products to support debt-to-equity swaps, (2) permitting financial asset investment companies to set up subsidiaries to act as a private equity investment fund manager and private equity investment funds, (3) bond issuances and (4) the use of bond repo transactions and interbank lending. However the Measures emphasise that the operations of the financial asset investment company must be firewalled off from the operations of any domestic bank that is a shareholder.

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Repairing and Preparing
Mon, 09 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/repairing-and-preparing/
http://www.harneys.com/insights/repairing-and-preparing/
Many owners of hurricane damaged properties have now either agreed a settlement figure after filing an insurance claim, or received an insurance payout. As a result, an increasing number of property owners have the benefit of greater certainty in relation to their financial position and are able to commit to undertaking repairs. This article aims to address some of the main pitfalls that property owners should bear in mind when planning and undertaking work to their properties.

Download the PDF to read the full article from VI Property and Yacht's July 2018 edition.

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European Union: adoption of the fifth anti-money laundering directive
Wed, 04 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/european-union-adoption-of-the-fifth-anti-money-laundering-directive/
http://www.harneys.com/insights/european-union-adoption-of-the-fifth-anti-money-laundering-directive/
On 30 May 2018, Directive (EU) 2018/843 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (5AMLD) was adopted. This Directive should be transposed into national law by 10 January 2020.

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Sanctions in a globalised economy
Mon, 02 Jul 2018 00:00:00 +0100
http://www.harneys.com/insights/sanctions-in-a-globalised-economy/
http://www.harneys.com/insights/sanctions-in-a-globalised-economy/
We are living in a globalised age. Whilst the developed economies of the world are usually keen for markets to open and remain open for business, sanctions represents a unique instance where otherwise open economies may be forcibly closed from investors and the global economy at large. In Cyprus, the Russia and Iran sanctions regimes represent cases in point on this.

Russia

Cyprus has, of course, always sought to foster positive and business-friendly relations with Russia. Russia has, in return, contributed significant levels of foreign direct investment into the Republic. However sanctions emanating from the EU and, more recently, the US pose serious questions for such relations. All signs indicate that the Cyprus government and competent authorities seek to ensure full compliance with EU obligations but implementation can be harder to ensure where the economy and business-interests have become so intertwined; in many ways Russian sanctions are to Cyprus what Brexit is to the UK, a requirement on business to analyse every aspect of dealings to ensure full compliance with a new economic order.

The current crop of EU sanctions on Russia reached its zenith shortly following the shooting down of MH 17 over Eastern Ukraine in July 2014. From that time the EU (and others) imposed:

Asset freezes and travel bans on those seen as responsible for the Maidan deaths in Ukraine, including former President Yanukovych himself (EU Regulation 208/2014);

Asset freezes and travel bans on those seen as responsible in Russia for the annexation of Crimea (EU Regulation 269/2014);

Blacklisting all EU-Crimea business activity (EU Regulation 692/2014); and

Imposing ‘sectoral sanctions’ on Russian state owned enterprises, as well as Artic and shale oil development (EU Regulation 833/2014).

Under President Obama, the US broadly followed the above approach. However, since the Republican take-over of Congress, the US position on Russia has become more hawkish, most evident in the blacklisting of numerous high-profile Russian businessmen by OFAC on 6 April 2018 (US Countering America’s Adversaries Through Sanctions Act). This renewed push by the US will have consequences for Cyprus-Russia relations, owing to the continued prominence of our US-dominated global banking and finance regime. Clearly it has never been more important for institutions to seek and obtain appropriate advice and representation.

Iran

In many ways Iran is the opposite of Russia, as far as sanctions are concerned. For years, the Islamic Republic was held back by crippling UN and Western sanctions from developing normal business relations in its neighbourhood. Then a breakthrough came in 2015, following the signing of the historic Joint Comprehensive Plan of Action (JCPOA). In Europe, this was legislated through significant reduction of sanctions contained in EU Regulation 267/2012 and was re-introduced to the global economy following decades in the wilderness. Cyprus was, indeed, on the cutting edge of these developments.

The exiting of the US from the JCPOA by the Trump regime signals a divergence of the approach between the US and EU. Whereas the US is keen to re-impose sanctions for participating in Iranian business, Europe is, by contrast, keen to prevent such measures from taking effect; it is keen to preserve the JCPOA as best it can. This is most evident in the recent announcement by the European Commission that it will move to implement a ‘blocking regulation’, protecting EU persons from the impact of US extra-territorial sanctions on Iran.

In the world of international business, it has never been more important for institutions, both public and private, to ensure they have their bases covered as far as sanctions compliance is concerned.

This article was originally published in Greek, on http://www.sigmalive.com/

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A Resurgent Argentina Seems Set to be Counting Amongst the Giants of Emerging Economies
Fri, 22 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/a-resurgent-argentina-seems-set-to-be-counting-amongst-the-giants-of-emerging-economies/
http://www.harneys.com/insights/a-resurgent-argentina-seems-set-to-be-counting-amongst-the-giants-of-emerging-economies/
International investors have always had a tumultuous relationship with Argentina. Sovereign defaults, economic decline, and general despair with the previous populist governments have plagued the once sixth-richest country globally for much for the twenty-first century. However, now, with a new president in place resulting in stability and fiscal growth including a sustained period of economic and trade resurgence we see one of Latin America’s largest economies on the right path that should propel it to take its rightful place in the world. Download the PDF to read Nicole Pineda's article in Intercontinental Finance. ]]>
BVI Hurricane Damaged Property: The Practicalities
Tue, 19 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/bvi-hurricane-damaged-property-the-practicalities/
http://www.harneys.com/insights/bvi-hurricane-damaged-property-the-practicalities/
There was a notable decrease in the number of BVI property transactions taking place after the hurricanes last year and it was clear that many prospective buyers put their plans on hold to assess the progression of the recovery. Since the beginning of 2018, we have seen a significant increase in interest from prospective buyers and in the number of property transactions taking place. Download the PDF to read the full article from VI Property and Yacht's June 2018 edition.]]>
Continuing obligations for Cayman Islands exempted companies
Thu, 14 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/continuing-obligations-for-cayman-islands-exempted-companies/
http://www.harneys.com/insights/continuing-obligations-for-cayman-islands-exempted-companies/
All exempted companies incorporated in the Cayman Islands are subject to the continuing obligations set out in the Companies Law. In addition, those companies which are regulated by the Cayman Islands Monetary Authority (CIMA), such as banks, mutual funds, mutual fund administrators, insurance companies, insurance managers, trust companies and others are subject to additional requirements.

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The Cayman Islands Director Registration and Licensing Law
Thu, 14 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/the-cayman-islands-director-registration-and-licensing-law/
http://www.harneys.com/insights/the-cayman-islands-director-registration-and-licensing-law/
The Cayman Islands Director Registration and Licensing Law (the Law) came into force in 2014, requiring directors of Cayman “covered entities” to register or become licenced by the Cayman Islands Monetary Authority (CIMA).

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Key deadline approaching for Cayman Islands Beneficial Ownership regime
Fri, 08 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/key-deadline-approaching-for-cayman-islands-beneficial-ownership-regime/
http://www.harneys.com/insights/key-deadline-approaching-for-cayman-islands-beneficial-ownership-regime/
Cayman Islands companies and LLCs1 are reminded that they have until 29 June 2018 to prepare their register of beneficial ownership, if they are in scope, or confirm which exemption applies to them and update their Cayman corporate services provider with those details.

Companies’ corporate services providers then have to file details from the register or of the relevant exemption with the competent authority in the Cayman Islands. The Cayman Islands government confirmed this week that those filings must be done by 29 June 2018 at the latest, to allow time for the data to be processed to meet Cayman’s obligation to have the system populated by 30 June 2018. Registers of beneficial ownership are not publicly available.

As Cayman Islands companies and LLCs either have to maintain a register or confirm the exemption they are relying on, action is required, unless the company has already complied.

Please see our related guide at right for details of the exemptions that are available, including for regulated investment funds, and the requirements in practice if a register has to be maintained.

1 Limited liability companies established under the Limited Liability Companies Law (LLC Law)↩

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Planning for Succession to BVI Companies
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/planning-for-succession-to-bvi-companies/
http://www.harneys.com/insights/planning-for-succession-to-bvi-companies/
Many companies registered in the British Virgin Islands have individual shareholders, and often, a single shareholder. Often the sole shareholder is also the sole director of the company. This briefing note summarises the methods and mechanisms which can be used in order to simplify the process on the death of a shareholder and director of a BVI company to ensure that ownership and control of the company can pass quickly and efficiently.]]>
Guide to BVI Private Trust Companies
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-bvi-private-trust-companies/
http://www.harneys.com/insights/guide-to-bvi-private-trust-companies/
A Private Trust Company (PTC) is, in straightforward terms, a company which is established for the purpose of acting as trustee of a trust, or a group of family trusts. Generally, when an off-shore trust is established, whether in the British Virgin Islands or elsewhere, a trustee resident in that off-shore jurisdiction will be appointed, usually a professional trustee company, such as Harneys Trustees Limited.]]>
Guide to BVI Share Trust
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-bvi-share-trust/
http://www.harneys.com/insights/guide-to-bvi-share-trust/
Harneys pioneered the BVI Share Trust, a simplified trust for clients who own shares in BVI companies with the primary objectives of (1) avoiding any forced heirship rules applicable in the country of domicile/habitual residence of the client; and (2) circumventing the requirement to obtain a grant of probate or letters of administration in the BVI (probate) in respect of those shares. Harneys have revised the Share Trust to offer a simpler, even more cost effective trust to meet these objectives.]]>
Guide to BVI Trusts
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-bvi-trusts/
http://www.harneys.com/insights/guide-to-bvi-trusts/
A trust is a legal relationship created when a person (the settlor) places assets under the control of another person (the trustee) for the benefit of specified persons (the beneficiaries) or for specified purposes. The trustee is the legal owner of the assets put into the trust and is required to manage those assets for the benefit if the beneficiaries or to further the specific purposes set out in the trust deed.]]>
Guide to the BVI Probate Rules for BVI Company Owners
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-the-bvi-probate-rules-for-bvi-company-owners/
http://www.harneys.com/insights/guide-to-the-bvi-probate-rules-for-bvi-company-owners/
Many companies registered in the British Virgin Islands have individual shareholders. Under the BVI Business Companies Act, shares in BVI companies are deemed to be situated in the BVI. Therefore, regardless of where the owner of a BVI company dies, his or her interest in a BVI company cannot be validly transmitted to his or her intended heirs until the appropriate grant has been obtained from the BVI Court.]]>
Guide to Vista Trusts
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-vista-trusts/
http://www.harneys.com/insights/guide-to-vista-trusts/
The Virgin Islands Special Trusts Act (VISTA) came into force on 1 March 2004. Trusts established under the Act, known as ‘VISTA trusts’ are unique to the British Virgin Islands. The VISTA regime was introduced as a solution to what is commonly referred to as ‘the prudent investor problem’.]]>
Guide to Purchasing Property in the British Virgin Islands
Tue, 05 Jun 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-purchasing-property-in-the-british-virgin-islands/
http://www.harneys.com/insights/guide-to-purchasing-property-in-the-british-virgin-islands/
This note is intended as a guide to clients wishing to purchase property in the BVI. It explains in outline the legal procedures involved in a standard transaction in typical circumstances. It is not a comprehensive guide on all aspects of property acquisition as each transaction has its own peculiarities.

Letter of intent

The first stage of most property transactions is the buyer and the seller agreeing the principal terms of the transaction such as price and any conditions which must be satisfied before the sale and purchase can proceed. These terms are typically recorded in a letter of intent, otherwise known as head of terms and the deposit is usually paid at this stage. The letter of intent is usually stated to be subject to contract which means that until the sale and purchase agreement has been entered into there is no legal commitment by either party to the other. Once the sale and purchase agreement has been entered into the buyer is legally committed to buy and the seller to sell at the stated price, subject to the agreed conditions.

Deposit

In a standard property transaction a deposit of 10 per cent of the purchase price is paid by the buyer. Paying a deposit prior to signing the sale and purchase agreement does not in itself secure the property, but along with the letter of intent it is an indication of serious intent and a buyer will usually expect the seller to withdraw the property from the market at this stage. The deposit is paid by the buyer either to the estate agent (if there is one) or to the seller’s lawyers before or upon signature of the sale and purchase agreement. The deposit will normally be placed on an interest bearing deposit account so as to earn interest. The interest follows the deposit and so if the sale proceeds normally, the seller will be entitled to the interest on the deposit at completion. If the sale does not proceed and the buyer recovers the deposit then the buyer will be entitled to the interest.

Sale and purchase agreement

The sale and purchase agreement is normally prepared by the seller’s lawyers and submitted to the buyer’s lawyers for amendment or approval. Amongst other things, it contains a description of the land, the nature of the title (whether freehold or leasehold), and the agreed price. In the case of developed property, it should document if any furnishings are included as part of the sale.

The buyer should always be sure to have arranged adequate financing before signing the sale and purchase agreement, or ensure that the sale and purchase agreement is made conditional on securing adequate financing. If the buyer is unable to pay the balance of the purchase price at completion, the buyer is likely to, at least, lose the deposit.

The sale and purchase of a property may be made subject to the satisfaction of one or more conditions. The nature of the conditions will depend on the particulars of the transaction but may include the buyer securing adequate financing and/or the buyer arranging and receiving the results of various property-related surveys and inspections to its satisfaction.

Land Holding Licence

Buyers who are not Belongers will need to obtain a Non-Belongers Land Holding Licence (a Licence) to hold the property. For this reason a sale of property to Non-Belonger buyers should always be made conditional on receipt of a Licence. Licence applications are generally made by the buyer’s lawyers, but in order to make the application the lawyers need to be provided with certain information about the buyer together with other supporting documents. A Licence application relates to a specific property and a specific buyer.

A Non-Belonger buyer purchasing undeveloped land will need to submit a proposal for its development as part of the application for the Licence. If the development proposal is approved, the development proposal will be included as a condition in the Licence which the buyer will be expected to comply with. Where the buyer fails to comply with a condition in the Licence, the BVI Government may impose a financial penalty.

A Licence will typically be granted with a condition not to undertake any alterations to the property without the consent of the Cabinet of the Virgin Islands. Where a Non-Belonger purchases a developed property and wishes to undertake alterations to it (such as adding bedrooms, bathrooms, a gazebo or swimming pool) the buyer should include details of their proposals as part of the application for the Licence, to avoid the need to make a further application for the required consent after completion.

The application process for a Licence typically takes approximately 3-5 months. A sale and purchase agreement will typically provision for 12 months to allow sufficient time for the buyer to secure the Licence. If the Licence is not secured within this timeframe the sale and purchase agreement will typically allow the parties to agree an extension of time, or for either party to terminate, in which case the buyer secures the return of the deposit.

Completion

Completion is usually arranged to take place within a specific time after the last of the conditions in the sale and purchase agreement has been satisfied. Upon completion the seller and the buyer sign an Instrument of Transfer which records the transfer of the property from the seller to the buyer. If the buyer is borrowing money to fund the purchase of the property then the buyer will need to sign loan documentation at completion. The balance of the purchase price is payable at completion. It is generally upon completion that the buyer takes possession of the property.

After completion

Immediately after completion, the buyer’s lawyers will present the Instrument of Transfer to Inland Revenue for payment of stamp duty. Stamp duty is calculated as a percentage of the higher of the purchase price and the market value of the property. For Belongers this is 4 per cent and for Non-Belongers this is 12 per cent. In each case a copy of a recent appraisal must be submitted as evidence of the market value. After stamp duty has been paid and the Instrument of Transfer stamped, the buyer’s lawyers will submit the Instrument of Transfer for registration at the Land Registry. After completion the buyer will need to ensure that any accounts for utilities are transferred to the buyer’s name.

Personal Attendance

None of the legal procedures requires the personal attendance in the BVI of the buyer or seller.

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Cayman Islands AEOI portal re-opens
Thu, 31 May 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-aeoi-portal-re-opens/
http://www.harneys.com/insights/cayman-islands-aeoi-portal-re-opens/The Cayman Islands government announced that the automatic exchange of information (AEOI) portal has re-opened, allowing Cayman Islands financial institutions to submit their 2017 FATCA and CRS returns. Various updated guides and forms are also now available on the Cayman Islands Tax Information Authority (TIA) website:

CRS Guidance Notesincluding clarifying the requirements for closing accounts and AEOI compliance obligations after a financial institution has been dissolved

Entity Self-Certification Form, this is to be used for all new entity accounts and includes a new 10% (instead of 25%) controlling ownership interest threshold for CRS for an entity that is a legal person, to reflect the amended Anti-Money Laundering Regulations 2017. There is no change to the 25% controlling person threshold for FATCA compliance.

What are the 2018 deadlines for Cayman Islands financial institutions?

30 April 2018: new Cayman financial institutions established in 2017 and before 30 April 2018 must register on the portal for FATCA and CRS compliance.

31 May 2018: deadline for 2017 FATCA and CRS reports to be submitted to the TIA via the portal.

31 December 2018: for CRS compliance, all Cayman financial institutions must obtain new entity self certification forms using the updated template for all pre-existing accounts on 31 January 2018 held by legal persons that were previously required to disclose their controlling person under Cayman Islands CRS laws.

Please contact your usual Harneys contact for further details of these changes, if you would like advice on any aspect of the AEOI regime in Cayman and how to comply with it or if you have any other questions or visit harneys.com/Cayman.

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An arbitration paradise
Thu, 31 May 2018 00:00:00 +0100
http://www.harneys.com/insights/an-arbitration-paradise/
http://www.harneys.com/insights/an-arbitration-paradise/
The British Virgin Islands (BVI) is a familiar jurisdiction to most professionals practising international commercial law. Stuart Cullen, counsel at Harneys, says in this article originally published by Latin Lawyer, that a recent increase in dispute resolution instructions coming from Latin America is accompanying the jurisdiction’s increasing profile in international arbitration too. Download the PDF to read more.]]>
Cayman Islands: FATCA and CRS reporting deadline extended to 31 July 2018
Thu, 31 May 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-fatca-and-crs-reporting-deadline-extended-to-31-july-2018/
http://www.harneys.com/insights/cayman-islands-fatca-and-crs-reporting-deadline-extended-to-31-july-2018/
Cayman Islands reporting financial institutions (FIs) have been given until 31 July 2018 to complete their FATCA and CRS reporting for the 2017 calendar year without the fear of further action by government authorities, the Cayman Islands government announced yesterday.

The AEOI reportingportal will close on 1 June 2018, as expected, and the government currently intends to re-open it on 15 June until 31 August 2018, to give FIs more time to complete their reporting obligations.

Although the statutory deadline for FATCA and CRS reporting remains 31 May 2018, provided that FIs have completed their reporting on or before 31 July 2018, no compliance or enforcement measures will be taken or penalties applied for late filing.

FIs that fail to meet the 31 July deadline (even though the government currently intends that the portal will be open until the end of August), may be subject to compliance reviews by the Cayman Islands Department for International Tax Cooperation.

FIs with CRS reporting obligations are reminded that they must file a ‘nil return’ for all CRS reportable jurisdictions even if they have no reportable accounts in those jurisdictions. Although not mandatory, Harneys recommends that FIs file ‘nil returns’ in respect of their FATCA reporting if they have no US Reportable Accounts.

Key dates

12 noon (Cayman time), 1 June 2018:AEOI portal closes

15 June 2018:AEOI portal expected to re-open

31 July 2018:2017 FATCA and CRS reporting must be completed to avoid penalties / enforcement measures

31 August 2018:AEOI portal expected to close

Please contact your usual Harneys contact if you would like advice on any aspect of the AEOI regime in Cayman and how to comply with it or if you have any other questions or visitwww.harneys.com/Cayman.

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Comparative Legal Guide British Virgin Islands: Restructuring & Insolvency
Tue, 29 May 2018 00:00:00 +0100
http://www.harneys.com/insights/comparative-legal-guide-british-virgin-islands-restructuring-insolvency/
http://www.harneys.com/insights/comparative-legal-guide-british-virgin-islands-restructuring-insolvency/This country-speciﬁc Q&A provides an overview of the legal framework and key issues surrounding restructuring and insolvency in the British Virgin Islands. Download the PDF to read more. This content was originally published with The Legal 500 in May 2018.]]>
Shareholder activism - Considerations for BVI companies
Fri, 25 May 2018 00:00:00 +0100
http://www.harneys.com/insights/shareholder-activism-considerations-for-bvi-companies/
http://www.harneys.com/insights/shareholder-activism-considerations-for-bvi-companies/
Once a fairly niche investment strategy of concern to US-listed businesses, shareholder activism is an increasingly global phenomenon. Estimates suggest assets under management (AUM) by activist funds increased by more than 1000 per cent over the past decade, with most of that growth occurring since the global financial crisis.

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Does GDPR Apply to Your Business?
Wed, 23 May 2018 00:00:00 +0100
http://www.harneys.com/insights/does-gdpr-apply-to-your-business/
http://www.harneys.com/insights/does-gdpr-apply-to-your-business/
The General Data Protection Regulation (GDPR) becomes enforceable across the EU from 25 May 2018. This flowchart is designed to assist international businesses to determine whether the requirements of the GDPR will apply to them. It focusses on those business generally based outside the EU/EEA but with some business activity within the EU/EEA. Please note this is a summary guide and does not constitute a legal advice.

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The re-imposition of sanctions against Iran by the United States and the impact on the BVI
Fri, 18 May 2018 00:00:00 +0100
http://www.harneys.com/insights/the-re-imposition-of-sanctions-against-iran-by-the-united-states-and-the-impact-on-the-bvi/
http://www.harneys.com/insights/the-re-imposition-of-sanctions-against-iran-by-the-united-states-and-the-impact-on-the-bvi/
Following the decision on 8 May of President Donald Trump, the United States of America will withdraw from the Joint Comprehensive Plan of Action (JCPOA) in relation to the Islamic Republic of Iran (Iran) and to effectively re-impose sanctions. For more about the United States’ decision, please see the White House fact sheet and the US State Department’s briefing paper.

The Department of the Treasury’s Office of Foreign Assets Control (OFAC) has produced a paper indicating the guidance on the sanctions that will be re-imposed and the various transitional periods within which the sanctions will be applicable.

There is guidance from the US Department of the Treasury that indicates that as soon as administratively feasible, the OFAC expects to revoke or amend as appropriate, general and specific licenses issued in connection with the JCPOA. At that time, OFAC will issue new authorisations to allow the wind down of transactions and activities that were authorised pursuant to the revoked or amended general and specific licenses. At the end of the 90 day and 180 day wind down periods, the applicable sanctions will be back in full effect.

In the British Virgin Islands (BVI), the directives issued by the BVI Financial Investigation Agency (FIA) prohibiting any dealing with Iran were repealed on 16 November 2016. Our previous note on this subject can be accessed here. With the UK set to leave the EU as a part of Brexit, the BVI will likely follow the EU’s lead in relation to any action the UK takes with Iran.

As of now, subject to the Iran (Restrictive Measures) (Overseas Territories) Order 2011 and the Iran (Sanctions) (Overseas Territories) Order 2016, there is no legislation that restricts BVI persons (including companies) from conducting business with Iranian persons (including companies). That being said, since the legal tender of the BVI is the United States Dollar, the majority of BVI persons and entities have business relationships with US intermediary banks and the proximity of the BVI to the US, BVI persons and entities conducting general business would be encouraged to:

conduct careful client due diligence checks to ascertain whether there is any Iranian element involved in the transaction;

document and have on file all of the corporate procedures used to vet and assess the transactions to which the BVI person and entities might be a part of;

discuss any suspicion with the BVI person or entities’ compliance unit for clearance to act on a transaction; and

engage with the FIA to the extent necessary.

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Fourth and Fifth Anti-Money Laundering Directives - implementing AML updates and UBO registers in Cyprus
Tue, 15 May 2018 00:00:00 +0100
http://www.harneys.com/insights/fourth-and-fifth-anti-money-laundering-directives-implementing-aml-updates-and-ubo-registers-in-cyprus/
http://www.harneys.com/insights/fourth-and-fifth-anti-money-laundering-directives-implementing-aml-updates-and-ubo-registers-in-cyprus/
The European Union’s Fourth Anti-Money Laundering Directive 2015/849 (4AMLD), was adopted by the European Parliament and Council on 20 May 2015. It needs to be transposed into the domestic legislation of all EU member states by 26 June 2017. 4AMLD repeals and replaces the EU’s (and world) current benchmark regime in this area, the Third Anti-Money Laundering Directive 2005/60/EC (3AMLD). The so-called ‘Fifth’ Anti-Money Laundering Directive (5AMLD) is in fact a set of proposed amendments to 4AMLD, looking to strengthen its core provisions in light of intervening terrorist events in Europe. The EU institutions currently aim to finalise 5AMLD by June 2017. Download the article to read more.]]>
BVI Corporate Reorganisations and Solvent Restructurings – A General Guide
Mon, 14 May 2018 00:00:00 +0100
http://www.harneys.com/insights/bvi-corporate-reorganisations-and-solvent-restructurings-a-general-guide/
http://www.harneys.com/insights/bvi-corporate-reorganisations-and-solvent-restructurings-a-general-guide/
The BVI Business Companies Act 2004 (the BC Act) provides an extremely flexible framework for reorganisations or restructurings involving solvent British Virgin Islands companies. This guide outlines key considerations under the BC Act and other relevant law regarding the following: share and asset sales, including “hive-outs” and “hive-downs”; inter-company financing and re-financing; distributions, including “hive-ups” and share buybacks; mandatory redemptions (“squeeze-outs”); mergers and consolidations, including “de-merger” structures; plans and schemes of arrangement, continuations and discontinuations; and new incorporations and voluntary liquidations. Click download to view the guide.]]>
Cayman Islands introduce country-by-country reporting for certain multinational enterprises
Thu, 10 May 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-introduce-country-by-country-reporting-for-certain-multinational-enterprises/
http://www.harneys.com/insights/cayman-islands-introduce-country-by-country-reporting-for-certain-multinational-enterprises/
The Cayman Islands recently approved regulations1 requiring certain multinational enterprises (MNE) to file a country-by-country report (CbC Report) with the Cayman Islands Tax Information Authority (TIA). MNE groups with annual consolidated group revenue in the preceding financial year of US$850 million or more with a Cayman entity in the group are caught. Under the Regulations, a constituent entity of an MNE group that is resident in the Cayman Islands has reporting or notification obligations (depending on whether or not it is the ultimate parent of the group) to notify certain financial information on the MNE group to the TIA. The deadlines for making notifications are 15 May or 30 September 2018, depending on how the entity is classified, as detailed below.

Cayman entities should now consider whether they are part of an MNE group and address any reporting or notification obligations.

Is your Cayman entity part of an MNE group?

The Regulations apply to:

Any group of enterprises related through ownership or control that is required to prepare consolidated financial statements

Where the group includes two or more enterprises which are tax resident in different jurisdictions, and

Where the total consolidated group revenue is US$850 million or more during the relevant fiscal year.

Guidance notes are expected to be issued shortly by the TIA to help businesses that may have responsibilities to report or notify information under the Regulations, including certain template forms and clarifying when they apply to investment funds, depending on their accounting treatment and accounting consolidation rules. We will issue a further alert once the guidance notes are finalised. Given the US$850 million annual group revenue threshold and the structure of many Cayman entities, we do not expect large numbers of Cayman entities will be part of a qualifying MNE group.

What are the reporting and notification obligations for qualifying MNE Groups?

Each ultimate parent entity2 of an MNE group that is resident3 in the Cayman Islands has to file a CbC Report with the TIA in respect of the group’s reporting fiscal year. The CbC report includes aggregate financial information for each jurisdiction in which the MNE group operates and details of each constituent entity of the MNE group. In certain circumstances, where the ultimate parent entity is not required to file a CbC report in its jurisdiction of tax residence, a surrogate parent entity of the relevant group that is resident in the Cayman Islands has to file the report instead. The information filed in CbC reports will then be exchanged with tax authorities in other participating jurisdictions. The first reporting year under the Regulations is the fiscal year which began during 2016.

The TIA has confirmed that it will apply a “soft opening” of TIA notification and reporting obligations, extending the dates set out in the Regulations. This means that the notification deadlines for MNE group members with respect to their fiscal year beginning on or after 1 January 2016 are:

15 May 2018, if the reporting entity is resident in the Cayman Islands; or

30 September 2018, if the reporting entity is not resident in the Cayman Islands. This applies to MNE group members that are resident in Cayman but not the ultimate parent / surrogate parent of the group, who then have to notify the TIA of the identity and tax residence of the relevant reporting entity.

The TIA will treat MNE group members that are resident in the Cayman Islands as being in compliance with their notification obligation and will not initiate enforcement action provided the notification obligation is complied with by these deadlines.

Notification is a one-off process via the TIA’s online portal and does not have to be repeated each year. The TIA has also confirmed that a single notification should be made for all constituent entities which are resident in the Cayman Islands which are in the same MNE group, to make the process more manageable and efficient.

A reporting entity that is resident in the Cayman Islands must make its first CbC Report by 31 May 2018, which is also an extension of the original date set out in the Regulations.

Why have the Regulations been introduced?

The Cayman Islands is a party to the Multilateral Competent Authority Agreement for country by country reporting with other participating jurisdictions and has also entered into a competent authority agreement with the UK on CbC reporting. The Regulations implement the reporting and notification requirements under these agreements into Cayman law and demonstrate Cayman’s continued commitment to international best practice on exchange of information with participating tax authorities, adding to reporting and notification obligations under Cayman’s implementation of FATCA, CRS and beneficial ownership registers.

What action should Cayman entities take now?

All Cayman entities that are part of a group structure should now consider if they are part of an MNE group under the Regulations. If they are, they will need to confirm if they are a parent entity with reporting and notification obligations or another constituent entity with notification obligations to the TIA, and whether they have to comply with those obligations by 15 May 2018 or later.

Please contact your usual Harneys contact if you would like advice on whether your group is subject to the Regulations and how to comply or if you have any other questions or visit harneys.com/Cayman.

2 A constituent entity that in/directly owns a sufficient interest in one or more other constituent entities of the MNE group so that it is required to prepare consolidated financial statements under accounting principles generally applied in its jurisdiction of tax residence, and there is no other constituent entity of the MNE group that in/directly owns such an interest in the first constituent entity

3 Resident means incorporated or having a place of effective management or being subject to financial supervision in the Cayman Islands

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The future for litigation funding in the Cayman Islands
Thu, 10 May 2018 00:00:00 +0100
http://www.harneys.com/insights/the-future-for-litigation-funding-in-the-cayman-islands/
http://www.harneys.com/insights/the-future-for-litigation-funding-in-the-cayman-islands/
Partner Nick Hoffman and associate Lachlan Greig discuss the future for litigation funding in the Cayman Islands in this article originally published by Cayman Financial Review. Download the PDF to read more.]]>
Data protection and the GDPR in Cyprus: The key requirements
Mon, 07 May 2018 00:00:00 +0100
http://www.harneys.com/insights/data-protection-and-the-gdpr-in-cyprus-the-key-requirements/
http://www.harneys.com/insights/data-protection-and-the-gdpr-in-cyprus-the-key-requirements/
We are now less than a month away from the day on which the General Data Protection Regulation (GDPR), the EU’s new mean machine for data protection regulation, kicks in on the 25 May 2018. In this article we provide an overview of the key requirements of the GDPR, how this will affect businesses in Cyprus, and the key compliance steps your business needs to prioritise as we approach the GDPR implementation deadline. Download the article to find out more.

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ESMA’s ban on binary options and highly leveraged CFDs for the retail market
Mon, 23 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/esma-s-ban-on-binary-options-and-highly-leveraged-cfds-for-the-retail-market/
http://www.harneys.com/insights/esma-s-ban-on-binary-options-and-highly-leveraged-cfds-for-the-retail-market/
On 27 March 2018, ESMA announced its intention to impose product intervention measures under MiFID II including a total prohibition on the provision of binary options and restrictions on the provision of some contracts for differences (CFDs) for retail investors. A copy of ESMA’s paper can be found here.

These measures would be made under Article 40 of the Markets in Financial Instruments Regulation (EU) No. 600/2014, known as MiFIR, which empowers ESMA to exercise product intervention powers. These powers vested in ESMA by virtue of Article 40 of MiFIR have only been applicable since 3 January 2018 and aim primarily to promote investor protection measures.

ESMA has also published Frequently Asked Questions on 27 March 2018 in relation to its product intervention measures. A copy of the FAQs can be found here.

Prior to reaching its decision, ESMA released a call for evidence on 18 January 2018 which lasted until 5 February 2018 (the Consultation). A copy of the Consultation can be found here. Having considered all the responses and concerns expressed by individuals and CFDs providers, ESMA reached to the conclusion that the use of its product intervention measures is the most appropriate and effective way forward in enhancing retail investor protection.

The agreed product intervention measures

In relation to binary options, ESMA decided on a total prohibition on the marketing, distribution and sale of binary options to retail investors. In relation to CFDs, the agreed restricted measures include the imposition of leverage limits on the opening of a CFD by a retail client from 30:1 to 2:1 which varies according to the volatility of the underlying; a margin close-out rule on a per account basis, negative balance protection on a per account basis to provide a guaranteed limit on client losses; a restriction on benefits incentivising trading; and a firm standardised risk warning.

Under the new MiFIR regime, these measures adopted by ESMA will apply on a three-monthly basis, which can be renewed before the lapse of the three month period.

Most importantly, ESMA’s product intervention measures supersede any national measures taken in relation to the same topic. In other words, they are directly applicable and they will not have to be implemented by any separate domestic action.

The aim behind the agreed measures

In recent years, ESMA along with national competent authorities (NCAs) have raised concerns in relation to the growing demand for CFDs and binary options across the EU. This is mainly due to the fact that CFDs are highly complex financial instruments. ESMA commented in its Additional Information on the agreed product intervention measures relation to contract for differences and binary options (a copy of this can be found here) that the pricing, trading terms and settlement of such products is not standardised, hindering retail investors’ ability to understand the terms of the product. In order to address these concerns, ESMA decided to exercise its produce intervention powers as a means to afford adequate protection to retail investors.

Furthermore, NCAs have raised further concerns on the risks to investor protection posed by these products. In particular, ESMA noted analysis by NCAs that a majority of retail investors have suffered significant losses on investments, with average losses per investor ranging from €1,600 to €29,000.

The way forward

ESMA will adopt these measures in the following weeks and once these measures are adopted, it will publish an official notice on its website. The measures will then be sent for publication in the Official Journal of the EU (OJ). The prohibition on binary options will start to apply one month after its publication in the OJ. The restrictions on CFDs will start to apply two months after their publication in the OJ.

Impact for Cyprus and passporting

The Cyprus Securities and Exchange Commission has issued an announcement notifying Cypriot investment firms of ESMA’s recent measures. The ban will be effective in Cyprus and it will be applicable to any business passported through Cyprus.

It may also be effective in respect to offshore service providers to the extent that a Cypriot investment firm is involved in assisting in the marketing and facilitating the distribution of these products via offshore platforms.

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EU Directive on Mandatory Disclosure for Intermediaries – “DAC6”
Fri, 20 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/eu-directive-on-mandatory-disclosure-for-intermediaries-dac6/
http://www.harneys.com/insights/eu-directive-on-mandatory-disclosure-for-intermediaries-dac6/
On the 13 March 2018 the ECOFIN Council reached an agreement to adopt the European Commission’s proposals to amend the Directive 2011/16/EU on administrative cooperation in the field of taxation by imposing mandatory disclosure rules on intermediaries who assist in tax aggressive arrangements. These proposals are inspired by BEPS Action 12, an ongoing related project at an OECD level.

The main purpose of these amendments, which are known as DAC6, is to provide a mechanism that will enhance and increase tax transparency throughout the EU and have a deterrent effect and dissuade EU based intermediaries from designing, implementing and marketing such tax aggressive cross-border arrangements, which effectively result in tax avoidance.

Who must disclose

The disclosure obligation lies with the intermediary, provided that the intermediary is either:

A tax resident in a Member State; or

Incorporated in and/or governed by the laws of a Member State; or

Registered with a professional association related to legal, taxation or consultancy services in at least one Member State; or

Based in at least one Member State from where it exercises legal, taxation or consultancy services.

An intermediary is defined as (i) any person (natural or legal or even an entity without legal personality) that designs, markets, organises, makes available for implementation or manages the implementation of the tax aspects of a cross-border arrangement (or series of such arrangements) that is rendered reportable; and (ii) any such person that undertakes to provide, directly or by means of other persons to which it is related, material aid, assistance or advice with respect to designing, marketing, organising or managing the tax aspects of a reportable cross-border arrangement.

In essence, any legal professional, consultant, accountant, financial advisor, tax advisor or financial institution, trust company and insurance intermediary, capable of undertaking the above will be caught under the definition of intermediary.

In cases where the intermediary has no presence within the EU or where the intermediary relies on legal professional privilege, the disclosure obligation shifts to any other intermediary involved in the transaction in the first instance or even to the taxpayer concerned where no intermediary is involved due to the arrangement being designed/implemented in-house.

Threshold for disclosure

A cross-border arrangement means an arrangement concerning either more than one Member State or a Member State and a third country. For a cross-border arrangement to be rendered reportable it has to be considered as ‘tax aggressive’. Although DAC6 does not define the term tax aggressive, reference is made to a number of features and elements of transactions and arrangements that present a strong indication of tax avoidance or abuse. These features and elements are referred to as hallmarks (listed in Annex IV of DAC6) and it suffices if an arrangement falls within the scope of at least one of those hallmarks to be treated as reportable. DAC6 provides for separate categories of hallmarks, some of which will only be rendered reportable if the ‘main benefit test’ is met. For this test to be met, it will have to be established that the main benefit or one of the main benefits of an arrangement is to obtain a tax advantage.

When to disclose and automatic exchange of information

The intermediary or taxpayer (depending on the facts of each case) will be required to disclose a reportable arrangement to the local tax authorities within 30 days from the day the arrangement is made available to the taxpayer or when it is ready for implementation or even when the first step of such arrangement has been implemented.

Thereafter, the competent authorities of the Member State to which the arrangement is disclosed, must automatically communicate and share this information with the competent authorities of all other Member States through the automatic exchange of information database that is already in place with regards to the Common Reporting Standard. The automatic exchange of such information must be taking place every three months.

Entry into force, domestic implementation and retroactive effect

The final text of DAC6 is in the process of being finalised and it will enter into force on the twentieth day following the date of its publication in the Official Journal of the EU. It is estimated that the entry into force will likely occur around June/July 2018. Each Member State must implement DAC6 into their domestic laws and regulations by 31 December 2019 and be in position to apply the new mandatory disclosure rules by 1 July 2020.

Due to the retroactive effect of DAC6, the new mandatory disclosure rules will cover arrangements where the first implementation step occurred during the period between the date of publication and the date of entry into force.

Therefore, the first disclosure of reportable arrangements to local authorities must be made by 31 August 2020 and the first automatic exchange of information between Member States will likely occur by 31 October 2020.

It is interesting to note that it is up to each Member State to decide what penalties will be imposed for non-compliance with DAC6.

Conclusion

The aim of DAC6 is to deter and combat any engagement in tax avoidance and abuse, however the provisions of DAC6 are so broadly drafted that they create uncertainty and raise questions as to whether the implementation of DAC6 will result in effective targeting of arrangements aimed to be caught under DAC6, and whether there is potential for incorrect targeting of arrangements which are not intended to be caught by DAC6. Furthermore, there are concerns as to whether the exchange of such information and arrangements between Member States will ultimately be useful.

It is also important to consider how claiming legal professional privilege under DAC6 will work in practice, noting that in claiming such privilege, the burden to disclose may be shifted from the legal professionals to their client.

It is nevertheless advisable that intermediaries begin assessing and monitoring the advice they provide to their clients to avoid falling within the ambit of DAC6, noting its retroactive effect.

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Cayman Islands Investment Funds AML Update: Natural persons must be appointed as AML officers
Fri, 20 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-investment-funds-aml-update-natural-persons-must-be-appointed-as-aml-officers/
http://www.harneys.com/insights/cayman-islands-investment-funds-aml-update-natural-persons-must-be-appointed-as-aml-officers/
The Cayman Islands Monetary Authority (CIMA) has confirmed that Cayman Islands investment funds must appoint natural persons as their money laundering reporting officer, deputy money laundering reporting officer and AML compliance officer (AMLCO/MLRO functions). Many funds currently delegate performance of these functions to their administrator or another service provider that is regulated for AML in an equivalent jurisdiction, especially where the fund itself does not have any individual employees, and there has not historically been a requirement in those situations to appoint a natural person to hold those offices. CIMA has confirmed that funds can subsequently delegate the AMLCO/MLRO functions, as long as they have designated suitable natural persons to the roles.

Most funds will therefore now need to appoint natural persons to these roles, review their fund administration agreements to make sure that the delegation of the function is dealt with and update their documentation and procedures regarding anti-money laundering compliance generally. This represents a substantial change in practice and comes after discussions between CIMA and the Cayman Islands funds industry to clarify some parts of the updated AML guidance notes1 published by CIMA in December 2017.

What are the key dates for compliance?

From 1 June 2018: all new regulated investment funds registering with CIMA must confirm who has been designated as MLRO, DMLRO and AMLCO, as part of their registration application on CIMA’s REEFS portal.

On or before 30 September 2018: all existing regulated investment funds must designate an MLRO, DMLRO and AML CO and submit details of them to CIMA via the REEFS portal.

All unregulated investment funds (eg private equity funds, hedge funds exempt from registration with CIMA) also have to comply with Cayman Islands AML obligations by 31 May 2018 (see our earlier alert for more details), which will mean appointing natural persons as MLRO, DMLRO and AMLCO, by the same dates as regulated funds, ie 1 June 2018 for new funds, 30 September 2018 for existing funds. Unregulated investments funds do not currently have to notify CIMA via the REEFS portal of the names of those who have been appointed.

Additional clarifications

Having appointed a natural person as an AMLCO, MLRO and DMLRO, delegation of the AMLCO/MLRO functions will remain subject to the outsourcing principles set out in the Guidance Notes which includes ensuring that the delegate:

has adequate and appropriate knowledge and expertise to perform the functions;

has adopted Cayman Islands AML standards where the function is being performed outside the Cayman Islands and the relevant AML standards are lower;

is risk assessed and subject to a formal agreement; and

is subject to appropriate AML policies and procedures which should be regularly tested.

CIMA is updating the Guidance Notes on these points and also to clarify AML requirements for payments from banks in equivalent jurisdictions and under what circumstances a gap analysis is needed when delegating AML functions. CIMA is also expected to consult further with the Cayman funds industry on issuing tailored guidance to unregulated investment funds on their AML compliance obligations. Cayman funds and their managers should keep in mind that CIMA can impose potentially substantial administrative fines for breach of the Cayman Islands AML regulations.

Please contact your usual Harneys contact if you would like advice on these changes and how to implement them or advice on any other aspect of the AML regime in Cayman and how to comply with it or if you have any other questions or visit harneys.com.

1 Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands, 13 December 2017 (Guidance Notes)

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The relevance of the GDPR to offshore
Fri, 20 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/the-relevance-of-the-gdpr-to-offshore/
http://www.harneys.com/insights/the-relevance-of-the-gdpr-to-offshore/
The GDPR, more precisely the General Data Protection Regulation[i], will come into force in the EU on 25 May 2018. Being EU law it might reasonably be imagined that it would be of minor direct relevance to institutions and establishments based offshore and outside of the EU. Not so. The territorial scope of the new regime is widely cast and will undoubtedly be of relevance to information and data travelling from the EU to offshore (and visa versa).[ii]

What is data protection? Why do we need it?

At the time of writing Facebook is in the middle of an erupting scandal involving the alleged misuse of personal data from as many as 50 million users. The allegations suggest that the data was harvested to materially impact the outcomes of the 2016 US Presidential election and UK Brexit referendum. In this age of internet it is easy to see that each person’s online data footprint can be of immense importance and value. In the EU, very much the standard bearer of global data protection law, the regime protecting data currently hails from a pre-internet era (circa 1995). That is about to change with the GDPR.

As we move into this brave new world, both legally and practically, it will be increasingly important for institutions active in the EU and elsewhere to ensure they comply with all applicable rules in data protection. Allied to this is the fact that the scope of the GDPR can extend well beyond the EU and into third countries, including offshore. It means that for the first time many offshore market participants are having to think about the possible consequences and ramifications of data protection rules on their firms and businesses.

Data protection: The basics

GDPR develops many of the core concepts grounded in the EU’s original Data Protection Directive (DPD, Directive 95/46/EC):

“Data processing” the core obligations under the GDPR attach to data processing. Processing refers to any operation performed on personal data, whether automated or not, and includes: collection, recording, organisation, structuring, storage, adaptation or alteration, retrieval, consultation, use, disclosure by transmission, dissemination or otherwise making available, alignment or combination, restriction, erasure or destruction.

“Personal data” refers to any information relating to an identified or identifiable natural person, such as employees or clients of service providers.

“Identifiable natural person” refers to a person who can be identified, directly or indirectly, by reference to an identifier such as a name, an identification number, location data, an online identifier or to one or more factors specific to the physical, physiological, genetic, mental, economic, cultural or social identity of that natural person. An identified natural person is also a “data subject”.

“Controllers” and “processors”: A controller is a person, corporate or otherwise, that determines the purposes and means of the processing of personal data. A processor is a person that processes personal data.

A single rule-book for the EU

The original DPD was an EU directive and as such considerable differences arose in its implementation across the Union. By contrast the GDPR harmonises the pan-EU position as the legislation is an EU regulation, ‘directly applicable’ in all member states. Local governments have limited input in the content of GDPR, with the exception of the level of penalties that may apply for breaches.

The usefulness of this for third countries should not be under-estimated. Following the implementation of the GDPR the EU may be treated as one composite whole rather than 28 separate member states (or 31 in the case of the EEA).

Outreach beyond the EU to offshore

The GDPR extends to third countries including offshore in the following principle ways:[iii]

It applies to processing personal data outside the EU by controllers/processors established in the EU, regardless whether the actual processing takes place in the EU.

It applies to processing personal data of EU data subjects by non-EU controllers/processors, where the processing activities are related to the offering of goods or services (including over the internet) or the monitoring of behaviour.

By way of example:

Corporate groups based inside and outside the EU will have to be very careful that data processing globally meets EU standards.

EU-based managers of offshore funds will now need to ensure that their funds process data in a GDPR-compliant way.

Offshore based service providers targeting EU clients through internet sales will need to comply with GDPR even though they may have no presence whatsoever in the EU.

Impact of GDPR on offshore business processes

Once caught by the GDPR offshore providers must ensure compliance with the core set of rights and obligations created under the regime, the most important being:

Data processing is permissible only for certain purposes: These purposes may be met where consent is obtained from a data subject or where there is a clear public interest. However in the case of consent such consent must be freely given and may be invalidated where there is, for example, a significant imbalance in bargaining power between the data subject and the controllers/processors.

Enhanced rights of data subjects: Data subjects enjoy significant rights under the GDPR including a ‘right to be forgotten’, right of access, right to data portability, right of rectification, right of erasure and so forth. All these rights must be built into the systems and controls adopted by controllers and processors as part of their businesses.

Requirement to appoint a data protection officer (DPO): Each controller and processor must appoint an individual with expert knowledge of data protection law as the DPO. Many of the tasks of a DPO are similar in nature to the tasks conducted by compliance officers in financial institutions. However DPOs need not be employed and as such the role may be outsourced to competent third parties subject to certain checks and balances.

Requirement to produce data protection impact assessments (DPIA): where a type of processing is likely to result in a high risk to the rights and freedoms of natural persons, in particular using new technologies, and taking into account the nature, scope, context and purposes of the processing, a controller must carry out an assessment of the impact of the envisaged processing operations on the protection of personal data.

Security of processing and encryption of data: controllers and processors, taking into account the state of the art, the costs of implementation and the nature, scope, context and purposes of processing as well as the risk of varying likelihood and severity for the rights and freedoms of natural persons, must implement appropriate technical and organisational measures to ensure a level of security appropriate to the risk. Such security may well include pseudonymisation and encryption of personal data.

Data transfers outside of the EU: Data transfers to certain third countries which are recognised as offering adequate protection are permitted without specific authorisation[iv]. Data transfers to other third countries are possible, provided that the controller or processor has implemented appropriate safeguards and on the condition that enforceable data subject rights and effective legal remedies are available.

Concluding thoughts

For firms and businesses accustomed to data protection regimes under, for example, the DPD much of the GDPR will resemble evolution rather than revolution. Yes, the fines will increase but on the whole the culture of data compliance continues much as before. In offshore world however this area’s general newness means that many providers will quite literally be stepping into a brave new world of data regulation. It will be very important that the right systems and controls are put in place at the outset.

GDPR comes into force throughout the EU on 25 May 2018.

We advise extensively on the application of the GDPR and data protection rules to businesses in the EU and offshore.

[i] Much of the EU’s thinking in this area was actually determined prior to the GDPR and following the judgment of the Court of Justice of the EU in Google Spain SL, Google Inc. v Agencia Española de Protección de Datos, Mario Costeja González (2014)

[ii] The European Commission has recognised Andorra, Argentina, Canada (commercial organisations), Faroe Islands, Guernsey, Israel, Isle of Man, Jersey, New Zealand, Switzerland, Uruguay and the US (limited to the ‘Privacy Shield’ framework) as providing adequate protection. Adequacy talks are ongoing with Japan and South Korea.

[iv] GDPR applies additionally to the European Economic Area (EEA) which comprises the EU plus Iceland, Liechtenstein and Norway. In this article references to EU should imply relevance to the EEA as well.

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Cyprus and the United Kingdom sign Double Tax Treaty
Wed, 04 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/cyprus-and-the-united-kingdom-sign-double-tax-treaty/
http://www.harneys.com/insights/cyprus-and-the-united-kingdom-sign-double-tax-treaty/
On 22 March 2018, the new double tax treaty between Cyprus and the United Kingdom was signed (theNew Treaty). The New Treaty is pending certain legal proceedings by both contracting states following which it shall take full effect on 1 January 2019 in Cyprus. In the UK for withholding taxes for amounts paid or credited the New Treaty shall take full effect on or after 1 January 2019, for income tax and capital gains tax it shall take full effect from 6 April 2019, and for corporation tax for any financial year beginning it shall take full effect on or after 1 April 2019.

The New Treaty was signed in Nicosia by the Cyprus Minister of Finance Harris Georgiades and the British High Commissioner Matthew Kidd. The New Treaty updates the one signed by the two countries in June 1974 which came into effect in March 1975 and is based on the Organisation for Economic Co-operation and Development Model Tax Convention for the avoidance of double taxation on income and capital.

Taxes covered

The specific taxes which the New Treaty covers are as follows:

UK:

Income tax

Corporation Income tax

Capital gains tax

Cyprus:

Income tax

Corporation Income tax

Capital gains tax

Special Contribution for Defence of the Republic tax

Withholding Taxes

The New Treaty provides for 0 per cent withholding tax rate on payments of dividends, interest and royalties (with the exception of dividends paid by certain investment vehicles out of income derived, directly or indirectly, from tax exempt immovable property income, in such cases a 15 per cent withholding tax rate applies).

Capital gains

For capital gains, Cyprus retains the exclusive taxing right on the disposal of shares made by Cyprus tax residents, except in the following cases:

Where the shares derive more than 50 per cent of their value (directly or indirectly) from immovable property situated in the UK. This does not apply to shares in which there is substantial and regular trading on a Stock Exchange.

Where the shares derive their value or the greater part of their value (directly or indirectly) from certain offshore rights/property relating to exploration or exploitation of the seabed or subsoil or their natural resources located in the UK.

Cyprus also retains the exclusive taxing rights on pension income of Cyprus tax resident individuals, with the exception of certain cases of UK Government service pensions.

Conclusion

The New Treaty incorporates the 'Principal Purpose Test' (PPT), which is a minimum standard under the Base Erosion and Profit Shifting project. The PPT provides that a double tax treaty benefit shall not be granted, under conditions, if obtaining that benefit was one of the principal purposes of an arrangement or transaction. This measure is designed to tackle “treaty shopping” and puts a strong emphasis on ensuring that operations are supported by appropriate substance and reflect a principal commercial rationale.

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Blockchain: A Path to Innovation
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/blockchain-a-path-to-innovation/
http://www.harneys.com/insights/blockchain-a-path-to-innovation/"In the same way that the Cayman Islands has innovated to stay ahead of the curve in other areas, it must ensure that it leverages new technologies such as blockchain, writes Daniella Skotnicki from Harneys."

This article which examines the current regulatory landscape in the Cayman Islands as it relates to blockchain, or distributed ledger technology, was originally published in Cayman Funds in April 2018. To view the full article, click the download button on the right.

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The Cayman Islands beneficial ownership regime
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/the-cayman-islands-beneficial-ownership-regime/
http://www.harneys.com/insights/the-cayman-islands-beneficial-ownership-regime/
Under Cayman Islands beneficial ownership legislation, certain Cayman Islands companies are required to maintain details of their beneficial owners and relevant legal entities on a beneficial ownership register. Registers are not publicly available, although they can be searched in limited circumstances by the competent authority in the Cayman Islands.

This guide explains which companies are in scope of the Legislation and which are exempt, who is classed as a beneficial owner and a relevant legal entity, and the obligations for in scope companies and those who hold interests in them.

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Cayman Islands exempted companies: an overview
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-exempted-companies-an-overview/
http://www.harneys.com/insights/cayman-islands-exempted-companies-an-overview/
One of the reasons why the Cayman Islands is a leading offshore jurisdiction is the flexibility of Cayman Islands companies law. The main legislation regulating the formation and operation of companies in the Cayman Islands is the Companies Law. English common law and equitable principles and precedents are also followed in the Cayman Islands, where applicable. This guide provides a comprehensive overview of the Cayman Islands exempted company.]]>
Guide to Cayman Islands mergers and consolidations
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-cayman-islands-mergers-and-consolidations/
http://www.harneys.com/insights/guide-to-cayman-islands-mergers-and-consolidations/
The Cayman Islands’ statutory merger regime is set out in the Companies Law (the Companies Law) and the Limited Liability Companies Law (the LLC Law) which provide a process for ‘merger’ or ‘consolidation’ of companies. A ‘merger’ is where the assets, rights, obligations and liabilities of two or more companies are assumed by one of those entities and ‘consolidation’ is where the assets, rights, obligations and liabilities of two or more companies are assumed by a new Cayman Islands company, in each case without requiring court approval.

In this guide ‘Merger’ includes merger and consolidation, a ‘Constituent Company’ is a company (including a limited liability company established under the LLC Law (an LLC)) participating in a Merger and a ‘Successor Company’ is the new or existing company (including an LLC) acquiring the businesses of the Constituent Companies.

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Comparison of Cayman Islands limited liability companies and Delaware limited liability companies
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/comparison-of-cayman-islands-limited-liability-companies-and-delaware-limited-liability-companies/
http://www.harneys.com/insights/comparison-of-cayman-islands-limited-liability-companies-and-delaware-limited-liability-companies/
This guide summarises the Cayman LLC Law and sets out the key similarities and differences between the Cayman LLC and limited liability companies formed in the State of Delaware (Delaware LLC) under the Delaware LLC Law.]]>
Continuing obligations of a Cayman Islands exempted limited partnership closed-ended fund
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/continuing-obligations-of-a-cayman-islands-exempted-limited-partnership-closed-ended-fund/
http://www.harneys.com/insights/continuing-obligations-of-a-cayman-islands-exempted-limited-partnership-closed-ended-fund/
This guide details the requirements of an investment fund in the Cayman Islands assuming it is a Reporting Financial Institution under automatic exchange of information legislation in the Cayman Islands.]]>
Continuing obligations of a Cayman Islands Registered Mutual Fund
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/continuing-obligations-of-a-cayman-islands-registered-mutual-fund/
http://www.harneys.com/insights/continuing-obligations-of-a-cayman-islands-registered-mutual-fund/
This guide sets out the continuing obligations under Cayman Islands law of an open-ended fund registered with the Cayman Islands Monetary Authority (CIMA) under section 4(3) of the Mutual Funds Law (Mutual Funds Law).]]>
Directors’ duties and obligations under Cayman Islands law
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/directors-duties-and-obligations-under-cayman-islands-law/
http://www.harneys.com/insights/directors-duties-and-obligations-under-cayman-islands-law/
There is no statutory codification in the Cayman Islands of the general duties, obligations and liabilities owed by directors to Cayman Islands exempted companies and the general duties are based on a combination of English common law, statute and regulatory guidance. In most cases directors are responsible to the company and not, in the absence of special circumstances, to the shareholders as individuals. For these purposes as a general rule, the company is defined by reference to the interest of both present and future shareholders of the company as a whole and the consent of individual disadvantaged shareholders is not required where directors choose a particular course of action.]]>
Duties and obligations of a director of a Cayman Islands fund
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/duties-and-obligations-of-a-director-of-a-cayman-islands-fund/
http://www.harneys.com/insights/duties-and-obligations-of-a-director-of-a-cayman-islands-fund/
This guide provides an overview of the powers, duties and obligations of a director of an exempted company (Fund) incorporated under the Companies Law of the Cayman Islands (Companies Law) which is registered as a regulated fund under section 4(3) of the Mutual Funds Law of the Cayman Islands (Mutual Funds Law).

This guide is limited to the law and practice of the Cayman Islands. Other duties, obligations and potential liabilities may also arise under the laws of other jurisdictions.

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Exempted limited partnerships in the Cayman Islands
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/exempted-limited-partnerships-in-the-cayman-islands/
http://www.harneys.com/insights/exempted-limited-partnerships-in-the-cayman-islands/
The Exempted Limited Partnership Law (the ELP Law) governs the formation of exempted limited partnerships (ELPs) in the Cayman Islands. The Partnership Law also contains provisions relevant to the affairs of an ELP, being the main legislation governing partnerships generally. This guide discusses the nature of an ELP and its establishment and operation.]]>
Cayman Islands Foundation Companies
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-foundation-companies/
http://www.harneys.com/insights/cayman-islands-foundation-companies/
The Foundation Companies Law, 2017 (the Foundation Companies Law) introduces the foundation company as a new type of corporate vehicle in the Cayman Islands. The Foundation Companies Law is drafted to allow the foundation company to be rooted in Cayman Islands company law, but function like a civil law foundation and only applies to companies that have been declared by the Registrar of Companies (Registrar) to be a foundation company.This Guide sets out the key features of foundation companies and how they are formed and operated.]]>
Investment funds in the Cayman Islands
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/investment-funds-in-the-cayman-islands/
http://www.harneys.com/insights/investment-funds-in-the-cayman-islands/
The Cayman Islands is the leading jurisdiction for the offshore investment funds industry due to its combination of flexible and appropriate regulation, an approachable and effective regulator, professional service provider expertise, high reputation among investors and a tax neutral regime.

This guide provides a comprehensive overview of investment funds in the Cayman Islands, including fund vehicle options, general procedures around establishment and operation of funds, and regulatory issues.

This Guide sets out the key features of LLCs and how they can be formed under the Limited Liability Companies Law (LLC Law).

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Guide to registering security interests created by Cayman Islands exempted companies
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/guide-to-registering-security-interests-created-by-cayman-islands-exempted-companies/
http://www.harneys.com/insights/guide-to-registering-security-interests-created-by-cayman-islands-exempted-companies/
This Guide discusses the Cayman Islands Companies Law (the Companies Law) requirements relating to the registration of security interests (eg mortgage, charge, pledge, encumbrance) over the assets of a Cayman Islands exempted company.]]>
Rights of third parties in the Cayman Islands
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/rights-of-third-parties-in-the-cayman-islands/
http://www.harneys.com/insights/rights-of-third-parties-in-the-cayman-islands/
The Contracts (Rights of Third Parties) Law (the Law) gives third parties the ability to enforce contractual rights expressly granted to them in Cayman Islands law governed contracts to which they are not a party, subject to certain exceptions.]]>
Securities Investment Business Law in the Cayman Islands
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/securities-investment-business-law-in-the-cayman-islands/
http://www.harneys.com/insights/securities-investment-business-law-in-the-cayman-islands/
The Securities Investment Business Law of the Cayman Islands (the SIB Law) regulates the conduct of certain securities investment activities, including dealing, arranging deals in, managing or advising on assets, rights, interests or certain other specific financial instruments or transactions, in or from within the Cayman Islands.]]>
Succession planning for your shares in a BVI company
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/succession-planning-for-your-shares-in-a-bvi-company/
http://www.harneys.com/insights/succession-planning-for-your-shares-in-a-bvi-company/
Death and taxes, despite our best laid plans, are still with us. While trying to legally reduce your tax liability has become politically unacceptable and unfortunately, there is still not much we can do about death, there are however many options that you should consider in order to properly deal with your assets when you are no longer here. As uncomfortable as this may be everyone who owns shares in a British Virgin Islands (BVI) company should consider what they want to happen to those shares when they are no longer around or if they become unable to look after matters for themselves.

BVI law offers a number of options that prevents succession planning from becoming a high cost nightmare and changes it into simply the next step in your life plan. The options of reserve directors, joint tenancies and Share Trusts give a shareholder the option of unprecedented freedom and flexibility to determine succession to shares in their BVI companies. With these options one is able to achieve the desired results without the need for substantial amendments to company constitutional documents, with minimal disruption to practical management, and while still controlling the business and enjoying the profits of a well-executed plan. This guide examines the succession planning options available to shareholders of BVI companies, providing a general overview of advantages of each approach.

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Taking security over shares in a Cayman Islands company
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/taking-security-over-shares-in-a-cayman-islands-company/
http://www.harneys.com/insights/taking-security-over-shares-in-a-cayman-islands-company/
This guide discusses the Cayman Islands law requirements when taking security over shares in a Cayman Islands exempted company (a company).]]>
Voluntary liquidation of a Cayman Islands exempted company
Tue, 03 Apr 2018 00:00:00 +0100
http://www.harneys.com/insights/voluntary-liquidation-of-a-cayman-islands-exempted-company/
http://www.harneys.com/insights/voluntary-liquidation-of-a-cayman-islands-exempted-company/
This guide outlines the procedure for a voluntary liquidation of a solvent Cayman Islands exempted company and the duties of its liquidator. It also sets out the process for striking an exempted company off the Register of Companies in the Cayman Islands.]]>
2018 brings important changes to Cayman Islands regulations and compliance for investment funds
Wed, 28 Feb 2018 00:00:00 +0000
http://www.harneys.com/insights/2018-brings-important-changes-to-cayman-islands-regulations-and-compliance-for-investment-funds/
http://www.harneys.com/insights/2018-brings-important-changes-to-cayman-islands-regulations-and-compliance-for-investment-funds/
This update highlights important changes to the regulatory and compliance regime for the Cayman Islands investment funds industry in 2018.

The changes that have been made to the Cayman Islands anti-money laundering (AML) regime are to bring Cayman in line with international best practice and are a welcome update to the financial services landscape in Cayman. The main change for those who use the jurisdiction for investment funds is the requirement to appoint natural persons as money laundering reporting officer (MLRO), deputy money laundering reporting officer (DMLRO) and AML compliance officer (AMLCO). Although performance of these functions can still be delegated to an administrator or another service provider, this change means that most funds will now need to appoint natural persons to these roles and then review their fund administration agreements to ensure that the delegation of the function is dealt with and update their documentation and procedures regarding anti-money laundering compliance generally. We would welcome the opportunity to discuss any of these issues with you in greater detail. Please get in touch with your usual Harneys contact or one of the authors of this alert, with any questions.

Unregulated Funds: Now explicitly subject to AML Regulations

As noted in previous briefings, unregulated funds (eg hedge funds exempt from registration with the Cayman Islands Monetary Authority (CIMA) or private equity funds) will need to comply with the Cayman Islands Proceeds of Crime Law (the PCL) and the Anti-Money Laundering Regulations (the AML Regulations) with effect from 31 May 2018.

In practice, unregulated funds will achieve AML compliance in much the same way that funds regulated by the Mutual Funds Law have done to date, namely by delegating these functions to a service provider, such as a regulated administrator or investment manager.

The most straightforward option available would be to delegate to an administrator or investment manager that is regulated for AML purposes in a recognised jurisdiction (eg Cayman Islands, Ireland or Bermuda), with equivalent standards to the AML Regulations. In such cases, compliance by the delegate with its jurisdiction’s regulations would be sufficient to ensure that the Cayman-based fund is compliant with its obligations, provided the fund has appointed natural persons as MLRO, DMLRO and AMLCO before it delegates these functions, as described below.

One important point to note is that US and Hong Kong based fund administrators are generally not regulated in the United States or Hong Kong and are only subject to general anti-money laundering legislation in those jurisdictions. As such, delegation to US or Hong Kong based administrators would be subject to confirmation that they will provide services in accordance with the PCL and the AML Regulations or the directors or general partner (for example) of the fund would need to confirm that the standards they adopt are equivalent to the Cayman AML regime. As is the case for regulated funds, natural persons would still need to be appointed by the fund as the AMLCO, MLRO and DMLRO in these circumstances.

Unregulated funds should take this into consideration as a matter of urgency this quarter.

The AML Regulations, Guidance Notes issued in December 2017 and a notice issued by CIMA in April 2018 now require all funds that are subject to the AML Regulations to designate natural persons as their MLRO, DMLRO and AMLCO. Once natural persons have been appointed, performance of these functions can then be delegated to a third party, such as the fund’s administrator.

This recent development means funds need to look at their administration or delegation agreements and liaise with the current service providers, to ensure that they appoint individuals to these roles and make appropriate amendments to their service agreements. Funds can continue to delegate the function of reporting suspicious activities to their administrator in accordance with their own regulatory obligations, once they have appointed these individuals. New funds registering with CIMA from 1 June 2018 will need to confirm who has been appointed to these roles as part of the registration process. Existing registered funds have until 30 September 2018 to confirm who has been appointed, via a filing on CIMA’s REEFS portal.

For those funds that now need to appoint an MLRO, DMLRO and AMLCO, these are management level roles and the responsibilities of an MLRO/DMLRO are substantial and include assessing reports of suspicious activity in relation to money laundering or terrorist financing and determining whether to report such suspicious activity to the Cayman Islands Financial Reporting Authority. Where the fund does not have its own employees (which will be the case for most funds), the Guidance Notes detail the criteria that should be applied in selecting an appropriate person to fill each role and guidance on the delegation/outsourcing decision making process. CIMA is currently updating the Guidance Notes to reflect its April notice and the requirement to appoint a natural person to these roles.

Until the new regime was adopted, for AML purposes, funds and their administrators had not been obliged to obtain full KYC documentation from investors whose accounts are held in their name at a bank regulated in an equivalent AML jurisdiction, on the basis that the appropriate due diligence had been undertaken by the bank.

As part of the overarching risk based approach that is now key to the AML regime, the AML Regulations require that, before the fund receives subscription monies from an investor’s account held at a regulated bank, the fund (or its delegate) will need to (a) conduct an assessment of the level of risk relating to the investor (eg low, medium or high) and have identified the risk as low and (b) have identified the customer and its beneficial owner and assessed whether or not full KYC documentation or further information is required. CIMA has confirmed that the Guidance Notes are also being amended to clarify these provisions.

In reality, very few fund administrators relied on the previous exemption and obtained full KYC from all investors regardless. Where that may not have been the case, the practical consequence of this will be that some investors in Cayman Islands funds will be required to provide full KYC in more situations than previously.

Substantial administrative fines for breaches of the AML Regulations

Amendments to the Monetary Authority Law and associated regulations came into force on 15 December 2017, giving CIMA increased powers to impose administrative fines for breaches of certain regulatory laws. These fines can initially be imposed for breaches of the AML Regulations, with a maximum fine of up to CI$1 million (US$1,219,500).

CIMA must classify breaches as minor, serious or very serious, and will apply these criteria when it exercises its discretion to impose fines. The minimum fine for a breach considered to be “minor” is CI$5,000 (US$6,098).

Once further regulations under the Monetary Authority Law are adopted, we fully expect CIMA to use these new powers to take increased action for breaches of all regulatory laws, including the Mutual Funds Law and the Securities Investment Business Law (eg failure to make filings within time limits without applying for exemptions or extensions).

New Tax Offence in the Cayman Islands Related to Anti-Money Laundering

Changes to the Cayman Islands Penal Code (the law which contains most criminal offences in the Cayman Islands) mean that a new criminal tax offence has been introduced into Cayman Islands Law. At first sight this may seem odd in a jurisdiction with no direct taxation, but a direct consequence of the new offence is to require reporting of suspicion of overseas tax evasion as part of the AML framework in the Cayman Islands.

It is now a criminal offence when a person, with intent to defraud the Cayman Islands Government: (a) wilfully makes, delivers or causes false or fraudulent information to be made to a person employed in the public service relating to the collection of money for the purposes of general revenue; (b) wilfully omits information required to be provided to a person employed in the public service relating to the collection of money for the purposes of general revenue; or (c) wilfully obstructs, hinders, intimidates or resists a person employed in the public service in the collection of money for the purposes of general revenue[1].

Without any specific punishment provided, the offence will be punishable with imprisonment for four years and with a fine. Not an insignificant deterrent.

As noted, the main offence of tax evasion is likely to be of limited applicability given the lack of direct taxation in the Cayman Islands.

The real impact of the new offence is as part of the Cayman Islands AML framework because overseas tax evasion is now ‘criminal conduct’ and the proceeds of such conduct would be the proceeds of crime. The Proceeds of Crime Law requires ‘dual criminality’ for offences that are not committed in the Cayman Islands in that the conduct must not only be an offence in the place where it is committed (if not the Cayman Islands) but must also be an offence in the Cayman Islands in order for it to be criminal conduct.

Failure to make the required disclosure, when a person knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct (eg tax evasion overseas), in the absence of any defence, is punishable with prison time or a fine or both.

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Cayman Islands Investment Funds: What you need to know and do by the first quarter of 2018
Tue, 02 Jan 2018 00:00:00 +0000
http://www.harneys.com/insights/cayman-islands-investment-funds-what-you-need-to-know-and-do-by-the-first-quarter-of-2018/
http://www.harneys.com/insights/cayman-islands-investment-funds-what-you-need-to-know-and-do-by-the-first-quarter-of-2018/
This guide is a one-page checklist of requirements or actions to be taken by Cayman Islands investment funds in the first quarter of 2018.]]>
BVI passes a new Limited Partnership Act
Thu, 21 Dec 2017 00:00:00 +0000
http://www.harneys.com/insights/bvi-passes-a-new-limited-partnership-act/
http://www.harneys.com/insights/bvi-passes-a-new-limited-partnership-act/
Harneys is pleased to welcome passage of the BVI’s innovative new Limited Partnership Act, which will come into force in early 2018.

Philip Graham, Head of Funds and Corporate for Harneys BVI, stated: “Harneys is eagerly anticipating the start of 2018 when the new limited partnership structures will become available to our clients.”

“The new regime draws on the popular and very successful BVI Business Companies Act, as well as best limited partnership practice from leading jurisdictions around the world, to provide a highly innovative new limited partnership structure which is keenly focused on the needs of our clients,” Graham continued.

Whilst retaining significant flexibility to cater for a wide number of demands, Harneys expect the new limited partnerships to be particularly attractive for funds and, in particular, private equity funds and joint venture vehicles where onshore tax transparency is required.

What are the key features of new BVI limited partnerships?

Simple, quick, cost effective registration of limited partnerships

Ability to have a limited partnership with or without legal personality

No requirement for a BVI based general partner

Flexibility on the terms of the partnership agreement, including specifically tailoring to cater for a default by limited partners

Ability to register a charge against a limited partnership with legal personality on the public register in the BVI and obtain priority under BVI law over subsequent charges

Extensive list of safe harbour provisions for limited partners in their dealings with the partnership, which are not considered to be taking part in the management of the limited partnership and so maintain and preserve limited partners’ limited liability

Inclusion of various corporate law concepts for limited partnerships, including merger (with rights for dissenting limited partners), consolidation, plans and schemes of arrangements, redemption of minority partnership interests and continuations

Detailed and specific provisions for the termination, deregistration, winding up and striking off of solvent limited partnerships, and also for winding up insolvent limited partnerships to maximise efficiency

The legislation is the result of a collaborative effort by leading legal practitioners in the BVI, including Harneys, together with the Government and experienced legislative draftsmen.

Harneys sees this development as an opportunity for many of our clients, and we will issue a further update once the Registry is open for the registration of new limited partnerships.

In its November ruling in the matter, the BVI Court of Appeal specifically considered whether a fresh issuance of shares by directors which altered the balance of voting power between the shareholders was done for a proper purpose.

The rationale behind the proper purpose ‘rule’ is that directors should not issue shares in a manner that could affect the balance of power between groups of shareholders in the company or to create new majorities. This is exactly what happened in this case: the directors created a new majority by the July Issuance, and it does not matter for the proper purpose rule whether the old or the new majority did not have a proprietary interest in the Fund.

The basic rule is that the directors’ purpose, however noble, should not be used to affect the balance of power in the company. If it is used in this way, it is an improper use of the power and is liable to be set aside. However altruistic those motives and reasons may have been “[t]hat is not, in itself, enough.” The Court applied the leading case of Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 82 and section(s) 121 and 184B of the British Virgin Islands Business Companies Act 2004.

Particularly where there is a power struggle between different groups of shareholders, as happened in this case, the directors should not issue additional shares in such a way as to affect the balance of power in the company (or fund) to influence in any way the outcome of shareholders’ resolutions, even if this results in additional capital or other benefits for the company.

This restriction is not written into the company’s articles and it is for this reason that the law (equity) imposes on the directors the additional requirement that the shares must be issued for a proper purpose. If the directors issue shares for an improper purpose, the issue is liable to be set aside. The fiduciary obligation to issue shares for a proper purpose was incorporated in section 121 of the Business Companies Act: protected and enforced through s.184B.

The fiduciary duty that is impressed on the directors to issue shares for a proper purpose is not minimised in any way if the shares that are being issued do not have a proprietary interest in the company and are not being issued for the purpose of raising capital.

This ruling has implications for all corporate and funds clients including directors and appointed officers. ]]>
Launching an ICO through a British Virgin Islands company
Fri, 01 Dec 2017 00:00:00 +0000
http://www.harneys.com/insights/launching-an-ico-through-a-british-virgin-islands-company/
http://www.harneys.com/insights/launching-an-ico-through-a-british-virgin-islands-company/
Interest in the setting up and distribution of initial coin offerings (ICOs) in the BVI and other offshore locations has mushroomed during 2017; we expect this to continue going forward. We set out below a summary guide of key BVI issues for parties to consider.

What are ICOs?

For present purposes we view ICOs as, typically, a means of raising third party capital through the issue of crypto-currencies, termed ‘tokens’, on a blockchain network. The fund raising is coordinated by the individuals or establishments sponsoring the ICO, termed ‘founders’. Once sufficient funds are raised they are invested by the issuing company in a project which is set out in further detail in the ICO’s business plan, known as a ‘white paper’.

The position of ICOs in the BVI

We set out below a high level summary of the relevant considerations when launching an ICO through a BVI company. For the purposes of this note, we assume that the ICO will be structured through a BVI business company, the current vehicle of choice for ICOs in the BVI.

Perhaps the most important point is that, at present, there are no ICO or blockchain specific rules or guidance yet issued by the government or regulator. At this stage the BVI is keen to take a ‘wait and see’ approach to ICO regulation which seems at present to be broadly in line with the position in the United Kingdom and across pan-EU law. As such we are left to considering the impact of the ‘pre-existing’ legislative and regulatory framework in the BVI.

Primary legal and regulatory considerations

The following laws are the most relevant to structuring an ICO through the BVI:

The Securities and Investment Business Act 2010 (SIBA)

The Proceeds of Criminal Conduct Act 1997 and its subsidiary legislation the Anti-Money Laundering Regulations 2008 and the Anti-Money Laundering and Terrorist Financing Code of Practice 2008 (together referred to as the AML Regime)

Below is a short description of the issues which each law seeks to address. The extent of the scope to which each law or a combination of the laws and regulations above will apply will largely depend on the unique structure of the ICO.

SIBA

SIBA contains a prohibition that no person may carry on, or hold themselves out as carrying on, investment business of any kind in or from within the BVI unless they holds a licence from the BVI Financial Services Commission or else benefit from one of the safe-harbours. What constitutes “investment business”, an “investment” and an “investment activity” are all defined terms in SIBA.

Most relevant to ICOs is the definition of “investments” under SIBA. This includes shares, interests in a partnership or fund interests, debentures, instruments giving entitlement to shares, interests or debentures, certificates representing investments, options, futures, contracts for differences, long term insurance contracts etc. Importantly however, ICO tokens or any form of crypto-currencies for that matter are not expressly classed as investments in their own right under SIBA. Understanding whether tokens issued under an ICO will therefore involve a consideration, typically, as to whether the token itself it equivalent to a security or, conceivably a derivative contract caught by SIBA. This is no simple task and requires professional legal advice in each case.

That said, most ICOs would not usually fall within the scope of SIBA and as such may conduct business legitimately without the need for the BVI company to hold an investment business licence.

SIBA requires that a prospectus be registered where an offer is made to the public. However, there are two points to highlight here:

Part II of SIBA which deals with “public issue of securities” is not yet in force

As mentioned earlier, the digital tokens or crypto-currencies issued under an ICO may well fall outside of the definition of securities under SIBA

In relation to (b), determining whether the type of crypto-currency can or will be considered “securities” in the SIBA context is key and to extent they are then certain exemptions may apply in any case so as not to require a prospectus or offering document to be published.

The AML Regime

The AML Law Regime needs careful consideration with respect to ICOs launched through BVI business companies. The AML Regime primarily focuses on the regulated sector in the BVI and requires certain policies and procedures to be established by “relevant persons” conducting “relevant business”. Both the terms “relevant persons” and “relevant business” are strictly defined terms. The requirements seek generally to provide for regulatory rules to minimise and eliminate any form of money laundering or terrorist financing through the BVI.

At present, ICOs are not caught within the definition of “relevant business” within the AML Regime and therefore the vehicle through which it is structured i.e. the BVI business company is unlikely to be deemed a “relevant person”. That being said, we would urge any ICO team about thinking about anti-money laundering and counter terrorist financing obligations regardless as a way of future proofing the business.

The FMSA

As relevant the FMSA regulates “money services business” in the BVI. Money services business under the FMSA entails: money transmission services, cheque exchange services, currency exchange services, the issuance, sale or redemption of money orders or traveller’s cheques or other such other services. These types of services contemplate money which amounts to legal tender, ie. fiat currencies. Digital tokens and forms of crypto currencies would therefore seem to fall outside the scope of the definition of money services business.

Beneficial Ownership Regime

Any detailed consideration of this regime is beyond the scope of this article and an analysis of the same may be found here. Very briefly, considerations around share ownership, voting rights, the right to remove a majority of the board of directors and the exercise of significant influence and control over an ICO Company will play a part in determining who needs to be recorded on the register. With this in mind, we do think that it is relatively straight forward to ensure that the identity of ICO token holders will not need to be maintained on any beneficial ownership register of an ICO company.

FATCA and CRS

Both of these regimes relate to the automatic exchange of tax information between Participating and Reportable Jurisdictions. The FATCA and CRS legislation will be relevant to determining the ultimate beneficial ownership of the BVI business company issuing the ICO. While these pieces of legislation will not be immediately relevant at the launch of the ICO they will need to be considered as the BVI business company acting as the issue starts to conduct business more generally.

Electronic Transactions Act

The ETA is relevant since everything in relation to the launch and conduct of the ICO will be done on an electronic platform. As such, understanding the impact of the ETA’s provisions on electronic signatures and record keeping requirements is fairly fundamental. In very general terms the ETA lends support to the position that electronic records will not be denied legal validity simply because they are maintained in electronic, as opposed to paper, format.

Conclusion

The BVI legislative regime is flexible and, in our view, able to foster the growing number of ICOs establishing there. Nevertheless it will be very important for each new ICO to be properly advised in order to mitigate any risks of falling into regulatory prohibitions or other legal risks.

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Cayman Islands: AML Regulations to take effect 31 May 2018 for unregulated investment and insurance entities
Wed, 22 Nov 2017 00:00:00 +0000
http://www.harneys.com/insights/cayman-islands-aml-regulations-to-take-effect-31-may-2018-for-unregulated-investment-and-insurance-entities/
http://www.harneys.com/insights/cayman-islands-aml-regulations-to-take-effect-31-may-2018-for-unregulated-investment-and-insurance-entities/Unregulated investment funds and some insurance entities in the Cayman Islands have been given a grace period until 31 May 2018 to establish anti-money laundering compliance programs under amended legislation that has just been passed by the Cayman Islands Government.

This transitional period is a welcome move by the Government, in particular for unregulated investment funds such as private equity funds which were not previously expressly bound by the preceding regulations and some of which may not currently have compliant anti-money laundering and countering the financing of terrorism (AML/CFT) policies and procedures in place.

Until earlier this year, unregulated investment funds (which includes closed ended investment funds or ‘private equity’ funds) had not explicitly been caught by the Cayman Islands Proceeds of Crime Law and the Anti-Money Laundering Regulations (the AML Regulations). Under the new legislation, the list of activities which are classed as relevant financial business in or from the Cayman Islands (RFB) has been expanded to include an entity that is “otherwise investing, administering or managing funds or money on behalf of other persons”, bringing the classification in line with the FATCA and CRS definitions of an investment entity and specifically including unregulated investment funds. Investment funds which are regulated under the Mutual Funds Law were, and remain, classed as conducting RFB and so are required to comply with AML/CFT legislation. The RFB list also now includes “underwriting and placement of life insurance and other investment related insurance”.

Updated guidance notes are expected to be adopted later this year. These will include sector specific guidance for all businesses required to comply with the AML Regulations. We will issue further client updates once the revised Guidance Notes are in effect.

Notes: FATCA is the US Foreign Account Tax Compliance Act, the intergovernmental agreement between the United States and the Cayman Islands and the Cayman Islands Tax Information Authority (International Compliance) (United States) Regulations (as revised). CRS refers to the OECD sponsored Multilateral Competent Authority Agreement and certain bilateral agreements or tax treaties regarding the common reporting standard on automatic exchange of information the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations (as revised).]]>
Implementation of MiFID II in Cyprus: Enhanced investor protection
Fri, 10 Nov 2017 00:00:00 +0000
http://www.harneys.com/insights/implementation-of-mifid-ii-in-cyprus-enhanced-investor-protection/
http://www.harneys.com/insights/implementation-of-mifid-ii-in-cyprus-enhanced-investor-protection/
This is the second in a series of articles on the implementation of Directive 2014/65/EU, (MiFID II), in Cyprus. Below we explore changes to the local industry that mandates greater investor protection. The Investment Services and Investment Activities and Regulated Markets Law 2017 (New IS Law) gives full effect to MiFID II in Cyprus and will from 3 January 2017 repeal and replace the legislative framework currently in place which implements Directive 2004/39/EC, or (MiFID I).

Increased safeguarding of client assets

The New IS Law bans the use of title transfer collateral arrangements (TTCAs) with retail clients for the purpose of securing or covering present or future, actual or contingent, or prospective obligations.

CySEC has also recently released directive DI87-01 on the safeguarding of client financial instruments and funds, product governance requirements and rules on the provision or receipt of payments, commissions and other monetary or non-monetary benefits (CySEC Directive), which implements Commission Delegated Directive (EU) 2017/593 (Delegated Directive). The CySEC Directive provides that firms must now also consider the appropriateness of using TTCAs with non-retail clients. In addition, a single officer of sufficient skill and authority must now be appointed with specific responsibility for matters relating to the firms’ compliance with their obligations on safeguarding of client assets.

Tightening of remuneration policies

The New IS Law introduces a number of restrictions on the incentives and rewards which may be given to sales staff working with both retail and professional clients. Key requirements in this respect include the following:

A remuneration policy must be put in place and approved by the management of the investment firm, with the purpose of the policy being to encourage responsible business conduct, fair treatment of clients as well as avoiding conflict of interest in the relationships with clients

Investment firms are now prohibited from making any arrangement by way of remuneration, sales targets or otherwise that could provide an incentive to its staff to recommend a particular financial instrument to a retail client when the investment firm could offer a different financial instrument which would better meet that client’s needs.

The CySEC Directive also provides further guidance in line with the provisions of the Delegated Directive in this respect, including for example on cases where the provision of research may not be considered to constitute remuneration.

Restrictions on inducements and commissions in advised sales

The new regime expands on the existing provisions restricting or prohibiting inducements. The New IS Law introduces a crucial distinction between the provision of independent and non-independent advice. When investment advice is provided, investment firms are required to inform clients in good time prior to providing the investment whether or not the advice is provided on an independent basis, and further whether the advice is based on a broad or on a more restricted analysis of different types of financial instruments and, in particular, whether the range is limited to financial instruments issued or provided by entities having close links with the advisor or any other legal or economic relationships which pose a risk to impartiality of the advice.

Of particular note is the fact that for investment advice to be considered independent, an advisor cannot accept fees, commissions or other benefits. Only minor payments may be accepted in certain very restricted circumstances. The CySEC Directive further provides that any remuneration, commissions or monetary benefits which a firm receives from the third parties in relation to providing investment advice on an independent basis or portfolio management must be passed on in their entirety to the client.

Changes to appropriateness assessment requirements

The legislation currently in place provides that investment firms are not required to carry out an appropriateness assessments where the service provided is ‘execution only’ and the relevant financial instruments are listed shares, money market instruments, bonds or other forms of securitised debt, UCITS funds or other non-complex financial instruments. The New IS Law modifies the financial instruments in relation to which an appropriateness assessment is not required, as follows:

Shares admitted to trading on a regulated market, an equivalent third country market or a multi-lateral trading facility, where these are shares in companies (except shares in non-UCITS collective investment undertakings and shares that embed a derivative)

Bonds and other forms of securitised debt admitted to trading on a regulated market, an equivalent third country market or a multi-lateral trading facility and money market instruments (except those that embed a derivative or incorporate a structure which makes it difficult for the client to understand the risk involved)

Shares or units in UCITS (except structured UCITS)

Structured deposits (except those that incorporate a structure which makes it difficult for the client to understand the risk of return or the cost of exiting the product before term)

Other non-complex financial instruments

Developments in relation to eligible counterparties

The New IS Law seeks to extend the investor protection obligations of investment firms towards with eligible counterparties. Under the current legislative framework, investment firms are not required to observe a number of investor protection requirements when dealing with eligible counterparties. The New IS Law expands such investor protection requirements on investment firms when dealing with eligible counterparties to include the following key obligations:

To act honestly, fairly and professionally in their dealings with eligible counterparties

To communicate in a way which is fair, clear and not misleading

To provide certain reports and periodic communications to eligible counterparties

Product governance

The New IS Law also introduces a new regime for product governance, with particular focus on the obligations of product manufacturers and distributors.

More specifically, an investment firm which manufactures financial instruments is now required to maintain, operate and review a process for the approval of each financial instrument and significant adaptations of existing financial instruments before it is marketed or distributed to clients. The product approval process must specify an identified target market of end clients within the relevant category of clients for each financial instrument and should ensure that all relevant risks to such target market are assessed and that the intended distribution strategy is consistent with the identified target market. Manufacturers must also provide distributors with all appropriate information on the financial instrument and the product approval process.

Manufacturers are also required to ensure that financial instruments are designed to meet the needs of the identified target market of end clients within the relevant category of clients, that the strategy for distribution of the financial instruments is compatible with the identified target market. To this end, the investment firm is required to take reasonable steps to ensure that the financial instrument is distributed to the identified target market.

In turn, investment firms which offer or recommend financial instruments which they do not manufacture must have in place adequate arrangements to understand the characteristics and identified target market of each financial instrument. An investment firm must understand the financial instruments they offer or recommend, assess the compatibility of the financial instruments with the needs of the clients to whom it provides investment services, also taking account of the identified target market of end clients, and ensure that financial instruments are offered or recommended only when this is in the interest of the client.

Investment firms are also required to undertake regular reviews of the financial instruments they offer or market.

Transaction reporting

Under MiFIR, transaction reporting requirements for investment firms have been expanded, both to cover a greater range of financial instruments but also to require additional mandatory information to be provided. In particular, increased transaction reporting will be required in respect of financial instruments admitted to or traded on a trading venue. Certain obligations are now also imposed on firms which only receive and transmit orders, but do not execute such orders.

Product intervention powers

MiFIR grants to ESMA (under Article 40) and to EU national competent authorities such as CySEC (under Article 42) certain product intervention powers allowing them to intervene. Measures adopted by ESMA under Article 40 are temporary and cannot exceed 3 months. However, at the end of the 3 months, ESMA may renew a measure.

Measures adopted by ESMA apply across Member States in the same manner.Measures adopted by EU national competent authorities can be permanent. Measures adopted by a national competent authority may apply to market participants established in the jurisdiction of the national competent authority adopting the measure as well as to market participants established in other Member States that carry out business in that jurisdiction. Accordingly, any product intervention powers exercised by CySEC would apply to CIFs or to market participants carrying on business in Cyprus.

ESMA announced its intention to consider exercising its product intervention powers under Article 40 of MiFIR in relation to contracts and binary options for retail clients in a public statement on 29 June 2017. ESMA further published a statement on 15 December 2017 on its preparatory work in relation to CFDs and binary options offered to retail clients.

Most recently, ESMA released a call for evidence on 18 January 2018 which lasted until 5 February 2018 (Consultation). In relation to CFDs, the restrictions being consulted on include the imposition of leverage limits, a margin close-out rule, negative balance protection to provide a guaranteed limit on client losses; a restriction on benefits incentivising trading; and a standardised risk warning. In relation to binary options, a prohibition on the marketing, distribution or sale of binary options is being considered.

Cyprus and Iran (the Contracting States) signed the Double Tax Treaty (the Treaty) on 4 August 2015.

Like most Double Tax Treaties, the Treaty complies with the Organisation for Economic Co-operation and Development Model Tax Convention for the Avoidance of Double Taxation (the OECD Model Convention) and applies to taxes imposed on behalf of each Contracting State, irrespective of the manner in which they are imposed.

The Treaty is expected to further foster trade and economic relations between the Contracting States and to offer certainty and fiscal incentives for investors looking to invest into and out of Iran, via Cyprus.

Taxes covered

The specific taxes which the Treaty covers for each Contracting State are as follows:

Iran:

Income tax

Cyprus:

Income tax

Corporate Income tax

Special Contribution for Defence of the Republic tax (SDC) tax

Capital gains tax

Permanent establishment

A permanent establishment, for the purposes of the Treaty, is a fixed place of business through which an enterprise of a Contracting State wholly or partly carries on the business in the other Contracting State. This definition is in line with the definition provided in the corresponding article of the OECD Model Convention. More specifically, a building site, a construction, assembly or installation project or supervisory activities in connection therewith, constitutes a ‘permanent establishment’ only if it lasts more than 12 months.

Income from immovable property

Article 6 of the Treaty, on income from immovable property, provides that income derived by a resident of a contracting state from immovable property (including income from agriculture or forestry) may be taxed where that immovable property is situated.

Business Profits

The profits of an enterprise are taxable only in the Contracting State in which it is resident unless it carries on business in the other Contracting State through a permanent establishment there, in which case the profit attributable to the permanent establishment may be taxed in the Contracting State in which it is located.

Dividends

Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State. Dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the recipient is the resident of the other Contracting State and the beneficial owner of the dividends the tax so charged shall not exceed:

5 per cent of the gross amount of the dividends if the beneficial owner is a company (other than a partnership) which holds directly at least 25 per cent of the capital of the company paying the dividends;

10 per cent of the gross amount of the dividends in all other cases.

Payments from Cyprus to Iran or other non-Cyprus resident persons or entities do not carry any withholding tax due to Cyprus local tax law provisions.

Interest

Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. It can, however, be taxed in the Contracting State in which it arises, but if the recipient is the resident of the other state and is the beneficial owner of the interest the withholding tax shall not exceed the rate of 5 per cent.

Payments from Cyprus to Iran or other foreign persons or entities do not carry any withholding tax due to Cyprus local tax law provisions.

Royalties

Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. Such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the recipient is the beneficial owner of the royalties, the withholding tax shall not exceed the rate of 6 per cent.

Capital gains

Capital gains arising from the alienation of company shares are taxable in the Contracting State where the alienator is resident, unless more than 50 per cent of the value of the shares is derived directly from the immovable property situated in the other Contracting State, in which case tax is levied in the Contracting State where the immovable property is situated.

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Does your Bermuda, BVI or Cayman Company need to complete a W8 form? We can help
Thu, 02 Nov 2017 00:00:00 +0000
http://www.harneys.com/insights/does-your-bermuda-bvi-or-cayman-company-need-to-complete-a-w8-form-we-can-help/
http://www.harneys.com/insights/does-your-bermuda-bvi-or-cayman-company-need-to-complete-a-w8-form-we-can-help/Some of our clients have recently been informed by their US bank (or withholding agent) that a new IRS W8 requires them to provide a Tax Identification Number (TIN) for their Bermuda, BVI or Cayman Company. However, in many cases a TIN is actually not required, as we explain in this legal update.

Background

The US Department of the Treasury Internal Revenue Service (the IRS) has changed the requirements for completion of its Form W8-BEN-E (the W8) with effect from 1 January 2018.

Foreign persons that are the beneficial owner of an amount subject to withholding tax in the US and wish to claim a reduced rate or exemption from withholding tax are required to complete and submit a W8. For many of our non-US clients this will relate to any financial account held with a US financial institution through their Bermuda, BVI or Cayman Company (foreign client account holders).

Many of our foreign client account holders have been informed by their US bank (or withholding agent) that the new W8 requires them to provide a Tax Identification Number (TIN) for their Bermuda, BVI or Cayman Company. Two issues arise in relation to that information: (a) Bermuda, BVI and Cayman Companies do not have a TIN; and (b) the requirement that a TIN must be provided is not correct.

The IRS’s Instructions for completion of the Form W-8BEN-E (Rev. July 2017) state that you do not have to provide a TIN if the jurisdiction of incorporation of your company does not issue TINs. However, if you cannot provide a TIN, the completed W8 must include a statement that explains that your Bermuda, BVI or Cayman Company is not legally required to obtain a TIN in Bermuda, BVI or Cayman. That explanation may be written on a separate attached statement associated with the W8. We are currently assisting many foreign client account holders through the issuance of a BVI legal opinion for their BVI Company that explains and clarifies tax matters under BVI law (including why their BVI Company does not have a TIN). Our opinion is then submitted by foreign client account holders with their W8. We consider such an opinion will constitute an unequivocal explanation and will satisfy the requirements of the IRS as regards completion of the W8.

Please contact us to discuss whether you should be getting a tax opinion from us for your Bermuda, BVI or Cayman Company and related W8.]]>
Cyprus signs Double Tax Treaty with Barbados
Wed, 01 Nov 2017 00:00:00 +0000
http://www.harneys.com/insights/cyprus-signs-double-tax-treaty-with-barbados/
http://www.harneys.com/insights/cyprus-signs-double-tax-treaty-with-barbados/Currently pending ratification, the treaty between Cyprus and Barbados (the Treaty) was signed on the 3 May 2017 by Mr Euripides L Evriviades, the High Commissioner of Cyprus in the United Kingdom, and by Mr Guy Hewitt, the High Commissioner of Barbados in the United Kingdom.

Once the domestic ratification procedures are completed and each country notifies the other of the same, the Treaty will enter into force and its provisions will have effect from 1 January 2018.

Based on the Organisation for Economic Co-operation and Development Model Tax Convention for the Avoidance of Double Taxation (the OECD Model Convention), with some minor adjustments, the Treaty will offer prosperity to both contracting states, enhancing economic relations, but also encourage trade with other nations.

Taxes covered

The Treaty applies to taxes on income imposed by either country, including taxes on gains from the alienation of movable or immovable property. The taxes which the Treaty specifically covers are:

Barbados:

Income Tax

Corporation Tax

Cyprus:

Income Tax

Corporate Income Tax

Special Contribution for the Defense of the Republic Tax (SDC Tax)

Capital gains

The Treaty shall also cover any identical or similar taxes which may be imposed in the future.

Permanent Establishment

Article 5 of the Treaty, which deals with permanent establishments, almost replicates the corresponding article of the OECD Model Convention. Article 5 provides that a building site, a construction, an installation project, or a supervisory or consultancy activity connected with it, shall be deemed to be permanent establishments if they last for more than 6 months, as opposed to the 12 months declared in the OECD Model Convention provision (the Permanent Establishment).

Income from Immovable property

Article 6 of the Treaty deals with income from immovable property and follows the OECD Model Convention’s verbatim word for word. This allows income derived by a resident of one country derived from the immovable property situated in the other country to be taxed in the country in which the property is located.

Business Profits

Article 7 of the Treaty refers to the taxation of business profits. The only difference between the Treaty and the OECD Model Convention on this matter is the fact that the profits of an enterprise can only be taxed by the contracting state in which the enterprise is deemed to be a resident of, with the exception that, if it carries out business in the opposite contracting state via a Permanent Establishment, the profit determinable to the Permanent Establishment may be liable to taxation by the country in which it is located in

Capital Gains

The Treaty provides that capital gains derived by a resident of one contracting state from the alienation of immovable property in the other contracting state, in combination with any gains from the alienation of movable property, forming a part of a Permanent Establishment's property, may be liable to tax in the contracting state in which the property is locate.

Moreover, any other capital gains, including the disposal of shares in any companies which are “property rich”, may also be liable to tax in the contracting state in which the alienator is deemed a resident of.

Dividends

Dividends, within the meaning of the Treaty, means income from shares, mining share, founders shared, or other rights not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income of shares by laws of the contracting state of which the company making distribution is a resident. Dividends paid by a company which is resident of a contracting state to a resident of the other, shall be taxable only in that other state. This however does not apply if the dividends derive from a Permanent Establishment through which the beneficial owner of the income carries on business in the contracting state from which the income is paid.

Withholding Tax

When it comes to taxation on dividend, interest and royalty payments, a withholding tax rate of 0 per cent has been set, so long as, in the case of interest and royalty payments made from a resident of one contracting state to a resident of the other contracting state, the transaction must remain at arm’s length. Cyprus does not impose any withholding taxes on dividends, interest or royalties (when not used in Cyprus) paid to any non-Cyprus tax resident person.

Offshore Activities

The Treaty also provides that a resident of one contracting state undergoing activities in the territory of the other contracting state will be treated as a trade or business operation in the latter state through a Permanent Establishment in respect of the activities under the circumstances, unless the overall duration of the activity is less than 30 days.

Relevant business organisations are treated as one for the purpose of evaluating the length of the activity at hand. Profits from maritime or air transport and activities in connection with exploration and the exploitation of resources may be liable to taxation only by the contracting state of which the enterprise concerned is a resident of. Wages and salaries, accompanied by other similar reimbursement acquired by a resident of one country in the field of employment linked with exploration or exploitation of the other contracting state may be taxed by the opposite contracting state.

On the other hand, if the employer is not a resident of the other contracting state and the duration of work amounts to less than 30 days in the 12 month window of that year, the reimbursement is liable to tax only by the state in which the employee is a resident of. Any capital gain received by a resident of one state from the alienation of exploration or exploitation rights/property used with the exploration or exploitation of the sea located in the jurisdiction of the opposite state may be taxed by the state whose jurisdiction the rights/property are located.

Elimination of Double Taxation

The credit method is used to eliminate double taxation in Cyprus as well as in Barbados. The credit against tax in the country of residence is limited to the amount of tax that would be payable on the income concerned in the country of residence.

Exchange of Information

Both contracting states follow the rules of the OECD Model Convention, with the addition of a protocol whereby the information required to accompany a request for information is laid out, in order to display the relevance of the information requested, while at the same time, complying with the Amendment of the Assessment and Collection of Taxes Law 78/2014. The provision also states that any information should not be provided unless the contracting state that made the request reciprocates the actions of this provision or applies administrative practices for the information demanded.

Conclusion

The Treaty will remain into force until terminated by either country by giving notice of termination through diplomatic channels of at least 6 months and not earlier than 5 years after the agreement comes into force. Should this Treaty be ratified and comes into effect on 1 January 2018, it could prove to be a big benefit for the economies of both contracting states, as this Treaty slowly forms Barbados and Cyprus into economic trading and investment hubs in Central America and Europe respectively. Treaties like this are of paramount importance for attracting foreign investment and promoting Cyprus as an international business centre.

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New rules for deceased persons holding BVI shares or other BVI assets
Tue, 31 Oct 2017 00:00:00 +0000
http://www.harneys.com/insights/new-rules-for-deceased-persons-holding-bvi-shares-or-other-bvi-assets/
http://www.harneys.com/insights/new-rules-for-deceased-persons-holding-bvi-shares-or-other-bvi-assets/
The BVI Government has passed new rules governing applications for Grants of Probate and Letters of Administration.

When a person dies holding BVI property, including shares in a BVI company, his/her executor or administrator must in most cases obtain a Grant of Probate or Letters of Administration in the BVI. This is true whether or not the deceased person had any other connection with the BVI, and whether or not their executor or administrator has already obtained a Grant in another jurisdiction.

The old rules date from the 1980s. The new rules are intended to befit the BVI’s new status as an international financial centre and to provide certainty in relation to particular areas. They also now align with other sets of probate rules in the eastern Caribbean.

The new rules will come into effect on 1 November. We will produce a more detailed analysis of their provisions shortly.

In the meantime, if you have any urgent questions please contact Sheila George, Johann Henry or your usual Harneys contact.]]>
MiFID II and Cyprus: Ready for 2018
Thu, 26 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/mifid-ii-and-cyprus-ready-for-2018/
http://www.harneys.com/insights/mifid-ii-and-cyprus-ready-for-2018/
This is the first in a series of articles from Harneys on MiFID II. Here we focus on scoping issues and changes to the perimeter of the local investment services regime.

Background

Cyprus has given full effect to Directive 2014/65/EU, (MiFID II), through the enactment of the Investment Services and Investment Activities and Regulated Markets Law 2017 (New IS Law). We outline below the key changes expected for the Cypriot financial services industry once the new MiFID II regime comes into force from 3 January 2018.The new local legislation repeals and recasts the vast majority of rules contained in the Investment Services and Investment Activities and Regulated Markets Law 2007 (OldIS Law) which implemented Directive 2004/39/EC, (MiFID I).

The macro perspective

MiFID II represents a vast panoply of EU regulations, rules and processes designed to harmonise and set a benchmark for European financial markets in investment services and activities. Together with Regulation (EU) No. 600/2014, known as MiFIR, these two legislative acts constitute the core of the new regime. MiFIR, as a European regulation, will be directly applicable from the same date as MiFID II and as such is not further implemented under the New IS Law. In addition to the provisions of the New IS Law and MiFIR, financial and credit institutions in Cyprus will need to have regard to numerous and growing subsidiary legislation issued at European level, “Level 2”, and comprising (as at the date of going to press):

At “Level 3” a range of guidance has been issued by the European Securities and Markets Authority (ESMA) as well as Q&A documents and opinions. Furthermore, the above framework continues to be refined through amendments being formed in consultation papers currently in circulation. The range and depth of such detailed rules and guidance lives up to the stated intention of using the MiFID II regime to impose a minimum standard of regulation on firms, and to achieve a greater level of convergence in such regulation across EU member states.

Implementation of MiFID II under the New IS Law: Scoping issues

New financial instruments

MiFID II, and consequently the New IS Law, has introduced the following additional new classes of financial instruments:

Physically settled derivatives relating to emission allowances

Emission allowances, consisting of any units recognised for compliance with the requirements of the EU Emissions Trading Scheme Directive 2003/87.

Regulation of data reporting service providers

The New IS Law also introduces the requirement for persons who wish to provide data reporting services to become authorised by CySEC. The requirements of the New IS Law distinguish between the various types of data reporting service provides, these being:

‘Approved publication arrangements’ (APAs), which provide the services of publishing trades on behalf of investment firms

‘Consolidated tape providers’ (CTPs), which provide the service of collecting trade reports on financial instruments from both trading platforms and investment firms, and consolidating this into a continuous electronic data stream made available to the market

‘Approved reporting mechanisms’ (ARMs), which provide the service of enabling investment firms to report transaction details to the relevant competent authorities.

The different requirements between the types of providers reflect tailored requirements which apply to each type of data reporting service, although all categories are subject to tight deadlines and relatively strict obligations. As compared to APAs, ARMs would seem to be subject to a relatively lighter regime, particularly as the responsibility or trade reporting remains with the investment firm, whereas APAs are instead subject to an obligation to improve the quality of data on OTC contracts.

Changes to territorial scope

Significant changes have been made to the territorial scope provisions of the New IS Law. We explore the impact of these changes in a separate article.

Revised exemptions regime

Overview

As with MiFID I, MiFID II comprises ‘mandatory’ as well as ‘optional’ exemptions. Cyprus has chosen not to exercise its discretion to implement any of the optional exemptions available – as such the exemptions contained in the New IS Law represent the revised exemptions regime contained in Article 2 of MiFID II.

As regards those mandatory Article 2 exemptions, MiFID II makes a number of changes compared to MiFID I; both in introducing certain new exemptions, but also in modifying existing exemptions. These changes are largely as a consequence of the widened scope of application of MiFID II, and do not ultimately represent a material expansion of the available exemptions. In terms of the existing exemptions which have been revised under MiFID II, these effectively result in narrowing the available exemptions.

Dealing on own account expanded, highly relevant to the Cypriot FX industry

The key exemption for own account dealers under the Old IS Law (MiFID I) has been significantly narrowed. Under the current regime persons who do not provide any investment services or activities other than dealing on own account will not be subject to licensing or regulation unless they, in summary, act as market makers or deal on own account on an organised, frequent and systematic basis by providing a system accessible to third parties in order to engage in dealings with them.

Under the New IS Law (MiFID II) the revised exemption will no longer apply to dealers in commodity derivatives, emissions allowances or emissions allowance derivatives. As such the dealing activities of the following types of persons may be subject to licensing under the New IS Law:

Persons who are members or participants of a regulated market or a multilateral trading facility, or who have direct electronic access to a trading venue, except for non-financial entities carrying out hedging activities for themselves or their group

Under the Old IS Law (MiFID I) commodity dealers not part of a wider financial or credit institution fell almost entirely outside of scope of the regime (under section 3(2)(k) of the Old IS Law equivalent to Article 2(1)(k) of MiFID I). That blanket exemption has gone under the New IS Law and in its place commodity dealers seeking to avoid regulation must now rely on a far more curtailed safe-harbour under section 4(1)(j) of the New IS Law equivalent to Article 2(1)(j) of MiFID II.

This provides an exemption only in respect of persons dealing or providing investment services in commodity derivatives to the clients of their main business, where this is an ancillary activity to their main business and where the main business does not consist of the provision of investment or banking services. In addition, persons looking to benefit from the exemption:

Must not apply a high-frequency algorithmic trading techniques

Must notify annually the relevant competent authority (the Cyprus Securities and Exchange Commission – CySEC) that they make use of this exemption and upon request report to the competent authority the basis on which they consider that their activity is ancillary to their main business.

Matched principal trading: reclassified and consequential

This last provision gives effect to the intention to include ‘matched principal trading’ within scope of the dealing on own account activity. Historically this has been considered to constitute ‘execution of orders’ under the Old IS Law (MiFID I). Matched principal trading would cover a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is never exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction.

With matched principal trading now being considered part of the investment activity of dealing on own account, rather than the investment service of execution of orders a number of consequences occur – perhaps the most significant being that the group company exclusion will no longer apply to it. This is because the group company exclusion applies exclusively to the provision of investment services – but not investment activities.

As such it will be imperative that EU entities providing broker-like services on an unregulated basis to group affiliates now reconsider whether such services will continue to be viable.

The organised trading facility

The New IS Law (MiFID II) introduces regulation covering the operation of a new type of trading venue, the ‘organised trading facility’ or OTF. As an investment service, operating an OTF will be subject to licensing by CySEC. OTFs will operate alongside the existing concepts of the regulated markets and the multilateral trading facility (MTF). An OTF is a multilateral system, other than a regulated market or a MTF, in which multiple third-party buying and selling interests in bonds, structured finance products, emission allowances or derivatives (i.e. non-equity instruments) are able to interact in the system in a way that results in a contract. The key distinguishing feature of an OTF is that in an OTF the execution of orders is carried out on a discretionary basis, where such discretion may be exercised by the operator of the OTF:

When deciding to place or retract an order on the OTF

When deciding not to match a specific client order with another order available in the system at a given time, provided it is in compliance with specific instructions received from a client and best execution obligations.

Regulation of algorithmic trading

The New IS Law (MiFID II) introduces a significant shift in relation to the regulation of algorithmic trading. Dealers engaging in high frequency algorithmic trading (HFAT), categorised as a sub-set to algorithmic trading, will no longer be able to benefit from the exemptions under the Old IS Law (MiFID I) and, as discussed above, will now need to become authorised by CySEC. Persons dealing in algorithmic trading other than HFAT will not be required to become authorised by CySEC, however they will be subject to some obligations newly introduced by the New IS Law.

More specifically, all persons dealing in algorithmic trading will now be required to have in place effective systems and risk controls to ensure their trading systems are resilient and have enough capacity, are subject to appropriate thresholds and limits which prevent sending erroneous orders, do not function in a way that contributes to a disorderly market and cannot be used for any purpose that is contrary to the rules of a trading venue to which it is connected. They will also need to have effective business continuity arrangements to deal with trading system failures and to ensure their systems are tested and monitored. A firm engaging in algorithmic trading or providing direct electronic access is required to notify accordingly CySEC and the competent authority of the trading venue of which it is a member, and must further maintain records to enable CySEC to monitor the firm’s compliance with these requirements.

Final thoughts

MiFID II has been years in the making. The ten years following the original MiFID have contributed to a fair amount of emotional ‘baggage’ for the industry to contend with: the 2008 Lehman Brothers crash, the 2009 Madoff scandal, LIBOR rigging in 2013. The list goes on. The new rules in many ways follow the classic adage on financial regulation – that it tends to be reactive rather than proactive. Indeed many of the changes to scoping and perimeter provisions in MiFID II look backwards over the experience of the last ten years. The absence of any significant regulation over, for example, the rapidly expanding financial technology sector is intriguing. It therefore remains to be seen whether the MiFID II regime will be able to achieve its aspirations to protect investors and empower competitiveness in this respect.From a Cypriot perspective however the net outcome of MiFID II results, in practice, in the transfer of much discretion from the local legislature and regulator under MiFID I to the EU competent authorities, namely the Commission and ESMA. Whilst excessive EU harmonisation and power transfer is often criticised, bearing in mind the strength in depth that the European institutions offer to smaller member states such transfers are in many ways and in practice to be welcomed as they level the playing fields throughout the Union.

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Cyprus tax residency requirements: 60 days of stay in Cyprus
Thu, 26 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/cyprus-tax-residency-requirements-60-days-of-stay-in-cyprus/
http://www.harneys.com/insights/cyprus-tax-residency-requirements-60-days-of-stay-in-cyprus/
On 14 July 2017, the Cyprus parliament voted the amendment of Article 2 of the Income Tax Law N118 (I)/02 on the criteria for determining the rights of an individual to be considered as a Cyprus tax resident.

Prior to the amendment, a Cyprus tax resident was an individual who had remained in Cyprus for at least 183 days in one calendar year. As per the new law, the below three criteria must be met for an individual to be considered a tax resident of Cyprus:

The individual must remain in Cyprus for at least 60 days in the tax year and must not be tax resident in any other state for the same tax year

The individual must carry out business in Cyprus and/or be employed in Cyprus and/or be a director in a company which is tax resident in Cyprus during the tax year of consideration

The individual must maintain a permanent residence in Cyprus, which can be rented or owned

If an individual who fulfils all the criteria, but ceases to fulfill the second criterion in the specific tax year, then that individual will not be considered a Cyprus tax resident in that specific tax year.

The total number of days of stay in Cyprus are calculated as follows:

The day of departure from Cyprus is not considered as a day of stay in Cyprus

The day of arrival in Cyprus is considered as one day of stay in Cyprus

Arrival in Cyprus and departure from Cyprus on the same day is considered as one day of stay in Cyprus

Departure from Cyprus and arrival to Cyprus on the same day is not considered as a day of stay in Cyprus

The amendment was published on 28 July 2017 and will be effective retroactively as from 1 January 2017 ie as from tax year 2017 (the tax year in Cyprus being the calendar year).

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The offshore advantage: M&A in the BVI
Thu, 19 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/the-offshore-advantage-ma-in-the-bvi/
http://www.harneys.com/insights/the-offshore-advantage-ma-in-the-bvi/
As the largest law firm in the BVI, Harneys has consistently worked on the biggest and most complex mergers and acquisitions (M&A) involving BVI companies. As we head into the last quarter of 2017, M&A both globally and in the BVI in particular continues to be an active and vibrant market despite global geopolitical concerns.

Transactions the firm has been involved with in the last two years alone have included one of the highest value take private transactions in BVI history (UTi Worldwide) by way of statutory merger, the reverse takeover of Knowlton Capital Inc by LeniGas Cuba Limited by scheme of arrangement, and the largest ever domestic M&A transaction (the acquisition by share purchase of a majority stake in Road Town Wholesale Trading Ltd) as well as countless confidential deals.

The BVI’s modern and flexible corporate statute, the BVI Business Companies Act 2004 (the Act) is specifically designed to facilitate these types of transaction, and the ease of exit continues to be a key factor driving the use of BVI structures for global investments. This article reflects on some of the reasons why the BVI continues to be at the forefront of global M&A.

Variety of acquisition structures

Perhaps the biggest advantage of the BVI is the range of possible acquisition tools, illustrated by the range of recent transactions Harneys has been involved with.

There are four main methods of acquiring a BVI company: (i) a straightforward share purchase or contractual offer, (ii) a statutory merger, (iii) a scheme of arrangement and (iv) a plan of arrangement. Ultimately, which structure is most appropriate will depend on the facts of a particular case, including the nature of the selling entity, the onshore tax treatment and the preferences of individual clients and their advisers (US based clients, for example, may have a preference for mergers as the mechanism most often used in their home jurisdiction).

Contractual offer/Share purchase

Probably the simplest and still the most common way of conducting an M&A transaction is a contractual share purchase, where the existing shareholder(s) agree to sell and the buyer(s) agree to buy the shares. Although from a BVI legal perspective the only document required for a transfer of shares is a written share transfer instrument (a short, straightforward one page document) in all but the simplest intragroup transaction there will also be a share purchase agreement (SPA) setting out the commercial terms of the sale. The SPA will set out the consideration structure and any adjustment mechanics; buyer protection in the form of representations, warranties and indemnities; seller protections such as limitations on liability and disclosure; deal with any conditionality; and set out the completion arrangements, the last of which will be the only part of the SPA in which BVI law will be a major factor and which is seldom controversial. Provided the basic requirements of BVI law are adhered to, there is no issue with buying or selling BVI shares using an SPA governed by a foreign law.

The only real disadvantage of the contractual offer structure is that in the context of a company with a large shareholder base it only binds shareholders who are willing to sell, although this risk to the buyer can be managed contractually (for example through conditionality in the purchase agreement). If a buyer ultimately acquires more than 90 per cent of the issued shares he can avail himself of mandatory squeeze-out provisions under BVI law.

Statutory merger

When the BVI first introduced its merger code, the drafters looked at Delaware and Canada for guidance and the provisions of the Act will be familiar to anyone with experience of mergers in North America.

The key procedural requirement is that the directors of each constituent company must approve a Plan of Merger setting out the details of the parties and the terms of the merger.1 This must also be approved by the shareholders, unless the merger is between a subsidiary and a parent (unlikely in an M&A deal). Unless a higher threshold has been specified in the Mem & Arts the approval threshold is a simple majority vote.

The parties will also need to execute Articles of Merger and file these with the Registrar of Corporate Affairs in the BVI. The merger is effective when these documents are accepted by the Registry, which recently introduced a premium service for faster turnaround on major deals (on the UTi transaction mentioned above, within 30 minutes of filing).

A merger may be between two BVI companies (often a BVI SPV established by the buyer for that purpose) or between a BVI company and a foreign entity. Regardless of whether the target company or the merger sub is the surviving entity, the obligations and assets of the BVI target will flow to the surviving entity.

Similar to the role of an SPA on a contractual offer, the relatively straightforward BVI documents are likely to be supplemented with a longer Merger Agreement, setting out in more detail and putting on a contractual basis the commercial terms of the merger.

Scheme of arrangement

A scheme of arrangement is a statutory, court sanctioned process, which was initially envisaged as a restructuring tool, but which has become a popular method of acquiring companies in a number of common law jurisdictions (in particular the UK, where it is used for the vast majority of public takeovers). The process involves the applicant (invariably the target company) first seeking a court order to call a meeting of the effected ‘creditors’ (the shareholders). If the transaction is approved by more than 50 per cent in number and 75 per cent in value of the members of each ‘class’2 of creditors, it will proceed to a court hearing for final approval (‘sanction’). The key documents are the various court applications and supporting documents and the circular to members.

There may also be an ‘implementation deed’ or some other form of contractual framework between the buyer and target company setting out the terms on which they will cooperate to pursue the scheme.

Since Harneys acted on the BVI’s first takeover by scheme of arrangement in 2010 there have been a number of others, although the cost and relative complexity of involving the court means that it is not suitable for every transaction. Schemes do have the key advantage that court sanction makes it virtually impossible for them to be subsequently challenged or derivative actions brought by aggrieved shareholders.

Another benefit is that the scheme is binding on all shareholders and the right to dissent and claim fair value for shares under section 179 of the BCA is only permitted ‘if the court allows’ and is not automatic (a right which otherwise applies for various corporate transactions including mergers and mandatory squeeze-outs). Consequently, for reasonably large M&A transactions where a comfortable majority of shareholders are likely to be in favour but a minority will be stringently opposed, a scheme can be the ideal instrument to give both the buyer and the target company management certainty and minimize post-closing legal risk.

Plan of arrangement

A plan of arrangement is a statutory process similar to a scheme which can be used for mergers, consolidations, and sales of shares or assets (and certain other corporate actions). The BVI legislation is closely modeled on the statute in Canada, where plans are a common alternative to statutory mergers.

A plan of arrangement can be initiated by the directors of a BVI company if they have determined it is in the best interests of the company and relevant third parties (eg the shareholders and/or creditors). The directors will apply for the court for an order approving the plan, and it is at the discretion of the court to determine who is required to be given notice of the transaction and what additional approvals, if any, are required. In theory, this opens the possibility that the directors could use a plan to sell the company without getting approval from or even giving notice to the shareholders, although in practice it would be very unlikely that a court would approve such a transaction.

While plans have not yet been widely used for takeovers in the BVI, Harneys acted on the first ever plan of arrangement in the BVI under the Act and it represents a potentially simpler and more cost effective alternative to a scheme in some circumstances.

Flexible corporate law

While it would be a slight exaggeration to say that the answer to any BVI corporate law question is ‘yes, if the Mem & Arts allow it’, it is certainly true that the BVI corporate regime is extremely flexible. This flexibility means that it is very rare for a purely legal issue to delay closing a BVI deal.

There are a few key differentiators between the BVI and many other jurisdictions which can be helpful in the context of an M&A transaction:

Simple solvency test for dividends. Most buyers do not want to pay cash for cash left in the business (beyond a normalised level of working capital). Accordingly, most target companies will return surplus cash to their existing shareholders before closing. In the BVI, the payment of a dividend requires only a simple solvency determination by the directors – there is no need for a complex determination of distributable reserves or for artificial transactions to reduce share capital to create reserves.

No prohibition on financial assistance. There is no prohibition on a BVI company giving assistance for the purchase of its own shares (and for this purpose, unlike the UK, the BVI makes no distinction between public and private companies). This is helpful in leveraged transactions where debt and/or security created to help fund the purchase price will sit at the level of the target company.

Most decisions can be made by a director’s resolution. In most M&A transactions the buyer will want to make certain changes at completion. At a minimum, this will usually involve changes to directors, but it may also include changes to the registered office/registered agent of the company, changes to bank mandates, amendment to the Mem & Arts and changes to accountants/auditors. In the BVI, all these decisions may be made at board level by majority decision, negating the need to have a second set of shareholder resolutions.3

Flexible ongoing governance regime. Of course, many M&A transactions do not involve the buyer taking a complete ownership stake in the business, and BVI law gives the parties a high degree of freedom to agree contractually and enshrine in the Mem & Arts the governance and shareholder arrangements they want to have in place going forward. We have worked on several deals in 2017 where a buyer was acquiring a majority of the shares but for tax and or regulatory reasons did not want ‘control’ and we have developed a range of bespoke solutions to address this while still protecting the buyer’s interests.

No Takeover Code. BVI corporate law does not distinguish between public and private companies, and there are no additional hurdles or restrictions which apply to public M&A in the BVI (although there may be relevant securities or listing regulations in the jurisdiction(s) in which the company is admitted to trading).

Premium Service. As mentioned above, the BVI registry’s premium service means that where an urgent approval is required, whether for a merger or simply to amend the Mem & Arts, it can be obtained quickly with a guaranteed four hour time frame during business hours.

Quick and easy incorporation. Where the target is BVI based, many buyers opt to use a BVI subsidiary as an acquisition vehicle (either to hold the shares, or to merge into the target). Establishing a BVI company is straightforward, quick and the cost is highly competitive when compared with other offshore jurisdictions.

No need for an extensive tax covenant and no transfer taxes

There is no stamp duty levied in the BVI on a transfer of share in a BVI company unless the company owns a direct or indirect interest in BVI property. As there are no corporate taxes in the BVI (assuming no property, employees or business being conducted in the BVI) there is usually no need for a complicated and heavily negotiated tax covenant apportioning pre-completion taxes and reliefs.

The common law edge

The legal system in the BVI is based on English common law, while its corporate statute has taken provisions and best practices from a range of jurisdictions including the US (principally Delaware), UK, Canada and Australia. As a result, BVI corporate law works harmoniously with the law of contract in other common law countries, and it is not unusual to have the principal transaction documents governed by a different governing law – for example a US law governed merger agreement or an English law governed SPA.

When the parties do decide to use BVI as a governing law, or where the choice of acquisition tool mandates it (such as a scheme of arrangement) they get access to a sophisticated legal system with ultimate appeal to the UK Privy Council. In addition, English case law is persuasive in the BVI, which means that lawyers have the advantage of a huge body of precedent from the world’s second largest legal jurisdiction for M&A transactions.

Conclusion

The BVI is one of the easiest countries in the world in which to undertake everything from billion dollar mega-mergers to the sale of non-trading holding companies owning a few acres of real estate. The diversity of acquisition options, allied with a flexible corporate legal system means that a structure can be found that will suit any client’s needs. The BVI Government and regulators recognize the importance of keeping the jurisdiction ahead of its peers, and Harneys works closely with these bodies and other industry stakeholders to develop innovative solutions and ensure that it evolves to meet the demands of clients around the world. Harneys continues to be at the forefront of this exciting area of law, and involved with some of the largest and most innovative transactions taking place today.

1 The plan must include: (i) the name of each constituent company to the merger; (ii) the name of the surviving company in the merger; (iii) in respect of each constituent company the designation and number of outstanding shares of each class of shares the number of shares of each class of shares in each subsidiary company owned by the parent company; (iv) the terms and conditions of the proposed merger including the manner and basis of converting shares in each company to be merged into shares, debt obligations or other securities in the surviving company, or money or other assets, or a combination thereof; and statement of any amendment to the memorandum or articles of the surviving company to be brought about by the merger.

2 Calculating the relevant classes for the purposes of a scheme is not straightforward (it does not follow that because a company only has one class of shares in issue, they can all vote as one class on a scheme). Under case law, “a class must be confined to those persons whose rights are not so dissimilar as to make it impossible for them to consult with a view to their common interest”.

3 Fundamental changes to the Mem & Arts may require shareholder approval. In addition the Mem & Arts may set out a higher threshold for certain decisions. Finally, as noted above, the threshold for approval of various different acquisition structures varies.

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Launching an ICO through Cyprus
Wed, 18 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/launching-an-ico-through-cyprus/
http://www.harneys.com/insights/launching-an-ico-through-cyprus/
We set out below a summary of relevant considerations when launching an initial coin offering (ICO) through Cyprus. For these purposes we assume the ICO is structured through Cyprus as a Cyprus company. Alternative vehicles may also be appropriate depending on the intended structure of each individual ICO.

Unlike many other popular jurisdictions for ICOs, Cyprus is an EU Member State and as such founders must comply with the panoply of Single Market regulation emanating from the EU. However, since ICOs (at this point in time) are largely unregulated, the benefits of launching in Cyprus can be significant: a European base and central time zone, as well as access to the jurisdiction’s vast array of tax treaties and overwhelming ‘white list’ status among tax authorities globally.

Primary Legal and Regulatory Considerations

The following laws are the most relevant to structuring an ICO through Cyprus:

Prevention and Suppression of Money Laundering and Terrorist Financing Law 2007 (AML Law), which implements EU Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, also known as the Third Money Laundering Directive (3AMLD).

Electronic Money Law 2012 (E-Money Law), which implements EU Directive 2009/110/EC on the taking up, pursuit and prudential supervision of the business of electronic money institutions (E-Money Directive).

Prospectus Law 2005 (Prospectus Law), which implements Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading.

EU Regulation 910/2014/EU which regulates the use of electronic identification and electronic identification (E-Signature Regulation).

We provide below a short description of the issues which each law seeks to address. The extent to which each such law is relevant to an ICO will depend on the specific terms and structure of the ICO.

IS Law

Under the IS Law, a person may not carry on or purport to carry on investment services and investment activities on a professional basis unless that person holds a licence granted under the IS Law. The definitions of “investment services” and “investment activities” are set out in the IS Law. “Financial instruments” are defined through a list of instruments common in today’s financial markets, however no specific mention of digital tokens or cryptocurrencies is made. The IS Law contains certain safe harbours which allow the provision of investment services as well as the performance of investment activities without the requirement to hold a licence under certain circumstances.

Each ICO will need to be evaluated on its merits, although it would seem that many ICOs would not be caught within the ambit of the IS Law since they would not amount to financial instruments as defined. However, ICOs which offer tokenised securities may be caught.

AML Law

The AML Law needs careful consideration with respect to all ICOs launched through Cyprus. The AML Law and directives issued by the relevant supervisory authorities focus primarily on the regulated sector in Cyprus and prescribe certain policies and procedures to be put in place by Cyprus regulated entities with respect to money laundering. Given the general application of the AML Law, we would caution any ICO team against thinking that if their intended ICO falls outside the ambit of the AML Law they need not concern themselves with anti-money laundering issues. Whatever the final determination is, we believe that there are solutions available in the market to mitigate against any person launching the ICO from falling foul of the AML Law.

The AML Law currently implements 3AMLD. 3AMLD has been recently replaced at the EU level by the Fourth Anti-Money Laundering Directive (EU) 2015/849 (4AMLD). This has not yet been implemented into Cypriot law, but is due to be towards the end of 2017. Importantly, the European Commission adopted proposals on 5 July 2016 for legislation to amend 4AMLD (these amendments being referred to informally as the “Fifth Anti-Money Laundering Directive”) that will require cryptocurrency exchanges and wallets to conduct KYC and identify suspicious activity on users and investors. As such, we expect Cypriot ICOs to be expressly caught by the AML regime in the near future.

PS Law

The main purpose of the Payment Services Directive has been to address the fragmentation of the European payment services market and further to increase competition in the payment services sector. Accordingly, the PS Law regulates all types of electronic and non-cash payments, such as credit transfers, direct debits, card payments, and mobile and online payments.

In certain circumstances an ICO may constitute the provision of a payment service.

E-Money Law

The E-Money Directive modernises the regulatory framework applicable to electronic money institutions and to address a number of inconsistencies which caused a disruption of the level playing field between payment services institutions and electronic money institutions. The E-Money Law implements this regime in Cyprus, and obstacles which previously prevented the arrival of new entrants in the sector are now resolved.

As with the PS Law, the E-Money Law may impose regulation of ICOs in certain circumstances.

Prospectus Law

The Prospectus Law requires that a prospectus be published in respect of “a public offer of securities”, which means a communication to persons in any form and by any means, presenting sufficient information on the terms of the offer and the securities to be offered, so as to enable an investor to decide to purchase or subscribe to these securities and includes.

Determining whether the tokens offered in an ICO may be considered to be “securities” in this respect will be key. To the extent that they are, certain exemptions apply which may in any case apply so as not to require a prospectus to be published.

Laws governing collective investment schemes

Collective investment schemes in Cyprus may be either undertakings for collective investment in transferable securities (UCITS) regulated by the UCITS Law or alternative investment funds (AIFs) regulated by the AIF Law and AIFM Law. In practice UCITS will not be relevant in ICOs but the AIF Law may be, where the ICO operates as a collective investment scheme offering equity or equity-like instruments.

FATCA and the CRS

FATCA and the CRS relate to the automatic exchange of information between jurisdictions for the purposes of combatting tax evasion. The extent to which these pieces of legislation will be relevant to an ICO will depend on the structure and, particularly in relation to FATCA, the beneficial ownership of the company acting as issuer in the ICO. Although not directly relevant to the launch of an ICO, these considerations also need to be given due attention when preparing the ICO.

E-Signature Regulation

The E-Signature Regulation is relevant to determining the requirements for accepting electronic signatures on terms and conditions or purchase agreements for tokens. Care needs to be taken that the ICO subscription process complies with the E-Signature Regulation’s requirements.

Contract law

Furthermore, to the extent that the purchase of tokens will be governed by Cypriot law agreements and terms and conditions, the rules of Cypriot contract law will also need to be observed. Contract law in Cyprus is governed by the Contract Law, Cap.149 of the statute laws of Cyprus, as well as common law development in the Cypriot courts and English common law principles adopted in Cyprus. Cypriot contract law is based on English contract law, and offers a flexible and commercially sensitive regime within which business can be conducted.

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BVI Business: A safe harbour from the storm
Tue, 17 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-business-a-safe-harbour-from-the-storm/
http://www.harneys.com/insights/bvi-business-a-safe-harbour-from-the-storm/
Hurricane Irma’s impact on the British Virgin Islands will be etched on the minds of those who lived through it forever, with the rebuilding of lives, homes and businesses expected to take many months. One heartening aspect of it all however is the impressive way in which the BVI regulatory and business community globally has worked together in the days after Irma passed to keep the BVI financial services industry genuinely open for business. This article looks at how the global BVI community helped provide a safe harbour from the storm for BVI financial services.

Worldwide VIRRGIN access and the key role of the FSC

After an initial couple of days when communications with the BVI were very difficult, and once it became clear quite how severe the hurricane’s impact had been on the ground in the BVI, BVI House Asia and various BVI professional services firms with offices in Hong Kong quickly gathered to discuss how to keep key BVI corporate services up and running from outside the jurisdiction. Essential to this was the ability to access the Financial Services Commission’s (FSC) VIRRGIN online corporate registry. Access to VIRRGIN was swiftly opened up to users worldwide for the first time, having previously been limited to users in the BVI, to allow professionals working with BVI companies from outside the BVI to continue to access information and make filings for BVI companies on VIRRGIN.

The FSC’s quick and efficient handling of numerous requests for new users, emergency passwords and extended access rights for existing users on VIRRGIN, combined with BVI House Asia arranging services usually provided from the BVI, meant that within days of Irma passing full VIRRGIN access was available. Clients could incorporate companies and obtain certificates, practitioners were able to make deposits on accounts, make full BVI Business Companies Act filings including security filings, and complete company searches. In turn, this meant that corporate and finance deals involving BVI companies could keep moving, investment funds could be established and businesses keep operating. BVI’s on-going compliance with international reporting standards via the BVI’s beneficial ownership information portal was also unaffected by the hurricane and remained operational. BVI financial services really were still open for business in a way that exceeded both hopes and expectations following a hit from a category 5 hurricane.

The FSC’s daily update bulletins also kept BVI professionals promptly updated on progress, so that they in turn could keep clients informed. Individuals at the FSC in Hong Kong, and in the BVI when they re-opened, were unfailingly helpful and available throughout, even when during initial days they too were waiting for news that family and friends were safe.

Collegiality defined

Similarly professional services firms, including law firms, accountants and corporate services providers, worked hard together to find industry-wide solutions for issues which worked for everyone, while maintaining their clients’ best interests. The fact that many professional services firms providing BVI services have offices around the world meant that colleagues could pick up BVI based client matters and cover them while their BVI colleagues moved to safety. Collaboration between the FSC and professional services firms also meant that everyone was able to provide the best service possible to

their clients in extreme circumstances. At Harneys we continue to work closely with BVI Finance and the BVI Government, advising them on the most pressing business needs following Irma and to help road map the future for BVI’s financial services sector.

Court move to St Lucia

Following Irma, the Eastern Caribbean Supreme Court has temporarily moved the Commercial Division of the High Court to Saint Lucia, and the Judges of the Commercial Division began hearing matters there on 25 September. Urgent matters were dealt with even before that date, ensuring that commercial litigation involving BVI entities could continue despite the physical damage in the BVI. Our Tortola offices remained operational and open after Irma, with key lawyers staying on island and helping with the court’s temporary move to St Lucia. Although we are expecting the court to return to the BVI in the short term, this temporary move is working well, with documents being able to be filed electronically, telephone hearings now taking place from London, Hong Kong and elsewhere around the world and comprehensive guidelines for practitioners having been put in place to ensure the efficient and effective operation of the Court. We also now have a temporary “pop-up office” on the ground on St Lucia with two BVI qualified advocates,Stuart CullenandChristopher Peasebased there and other lawyers able to fly in when needed.

Looking to the future

We are confident that the BVI as a key offshore financial services centre will rebound and continue to be an exciting, innovative and solutions orientated jurisdiction. The resilience and collaboration shown between the FSC and BVI professional services firms and individuals worldwide in keeping BVI financial services open for business in the aftermath of Irma underlines the determination of everyone involved to make sure that the BVI will continue to flourish. Harneys fully intends to be at the forefront of these developments.

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New AML regulations come into force
Fri, 06 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/new-aml-regulations-come-into-force/
http://www.harneys.com/insights/new-aml-regulations-come-into-force/
The Cayman Islands government recently adopted updated Anti-Money Laundering Regulations (the AML Regulations) which came into force on 2 October 2017. The AML Regulations demonstrate Cayman’s ongoing commitment to complying with the highest international standards on combatting money laundering and terrorist financing and aim to ensure consistency with the Financial Action Task Force (FATF) 2012 recommendations, in accordance with its position as a leading international finance centre. The adoption of the AML Regulations is part of the update of the Cayman Islands anti-money laundering (AML) regime following on from the updated Proceeds of Crime Law (the PCL) which took effect earlier this year.

This alert sets out key changes under the AML Regulations.

What’s new under the AML Regulations?

The AML Regulations make the following changes to Cayman’s AML regime for anyone carrying out relevant financial business (RFB) in or from the Cayman Islands:

Risk based approach : the AML Regulations include comprehensive procedural updates for assessing and applying a risk based approach to money laundering and terrorist financing risks and compliance. This includes the requirement to conduct a business risk assessment of products, practices, delivery mechanisms (data) and new or developing technology risks in accordance with the FATF recommendations. The practical application of the risk rating methodology will be expanded upon in updated guidance notes [1] which are expected to be issued by the end of the year and which are also expected to include further details of enhanced due diligence requirements for servicing new technologies, including cryptocurrencies.

Beneficial owners : the AML Regulations contain specific requirements to identify beneficial owners for legal persons and legal arrangements and to apply a risk based approach in conducting client due diligence on existing relationships. New beneficial owner definitions have been added, which closely follow the definitions in the FATF recommendations, FATCA [2] and CRS[3] .

Penalties : there is a substantial increase in the penalties that apply for breach of the AML Regulations. This is in line with other recent changes and proposed changes to increase penalties for breaches of various Cayman regulatory laws.

RFB list expanded : the list of activities which are classed as RFB is now contained in the PCL instead of the AML Regulations. The PCL revised the RFB list to include an entity that is “otherwise investing, administering or managing funds or money on behalf of other persons”, bringing the classification in line with the FATCA and CRS definitions of an investment entity. In essence this means that regulated and unregulated Cayman investment entities will now be subject to compliance with the Cayman Islands AML regime. Previously under earlier versions of the PCL and AML Regulations, investment funds which are regulated under the Mutual Funds Law were classed as conducting RFB and so required to comply with AML legislation, but non-regulated funds were not expressly covered by the definition of RFB. The RFB list also now includes “underwriting and placement of life insurance and other investment related insurance”. The updated Guidance Notes are expected to include sector specific guidance which will help those whose activities are now classed as RFB.

New competent authority for unregulated entities and possible transitional period : as the revised RFB list means that various unregulated entities will now be carrying out RFB, it is likely that a new competent authority will be established to supervise their AML compliance. There may also be a transitional period to allow those entities time to put in place appropriate procedures to comply with their new AML obligations. We will issue further updates once more details are available.

Countries with equivalent legislation : the list of countries which are deemed by the Cayman Islands to have equivalent AML legislation (previously referred to as Schedule 3 countries) is now approved by the Government’s Anti-Money Laundering Steering Group, which forms part of the Attorney General’s office. This change was brought in to allow the list to be amended without having to pass formal legislation. The list[4] is the same as the previous Schedule 3 list, except that Mexico, Panama and Turkey are no longer included.

Other revisions : more prescriptive definitions (previously contained in the Guidance Notes) have been added in respect of politically exposed persons, which includes their family members and close associates. New procedural requirements have also been added to conduct sanction checks. The Cayman Islands has implemented the UN Security Council Resolutions and the European Union and United Kingdom sanctions measures, which are applied against countries, regimes or persons designated to be in violation of international laws.

Are other changes expected?

Revised draft updated Guidance Notes are expected to be circulated by the Government for consultation in the next few weeks, and then finalised and adopted later this year. We will issue further client updates once the revised Guidance Notes are in effect.

Caribbean Financial Action Task Force (CFATF) evaluation

In accordance with FATF recommendations, financial institutions are expected to identify, assess and understand the AML and counter-terrorist financing (AML/CFT) risks to which they are exposed and take AML/CFT measures appropriate to those risks in order to mitigate them effectively.

The CFATF team is scheduled to make a mutual evaluation of the Cayman Islands regulatory framework during an onsite visit in December. As an integral element of its preparation, the Cayman Islands Monetary Authority (CIMA) is conducting a formal assessment of the AML/CFT risks present in various sectors of the financial services industry.

Those licensees affected [5] are currently being asked to complete a self-assessment relating to their specific business risks and AML/CFT controls to allow CIMA to obtain a complete and comprehensive view of each sectorial risk. The self-assessment form is available to the relevant licensees on the REEFS portal.

Please contact your usual Harneys contact if you have any questions or would like further advice on your AML obligations.

[1] Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (Guidance Notes)

[2] the US Foreign Account Tax Compliance Act, the intergovernmental agreement between the United States and the Cayman Islands and the Cayman Islands Tax Information Authority (International Compliance) (United States) Regulations (as revised)

Harneys weathered Hurricanes Irma and Maria and our BVI office reopened shortly after the passage of the storms with all teams and practice groups providing normal client service. Our lawyers are physically on the ground and have been busy responding quickly and comprehensively to client queries in our usual timely, commercial and solution-oriented manner.

Now that the immediate threat posed by the storms has passed, attention inevitably must turn to recovery and how best that recovery may be facilitated as quickly as possible. We have set out below an overview of some of the pertinent issues for property owners at this time.

Insurance

Many property owners will have the benefit of a policy of insurance against which they may submit a claim for loss and damage incurred as a consequence of the storms. While the majority of claims should as a matter of course be processed without the need for legal assistance, our lawyers are available to assist with the claims process and to liaise with the local insurance companies, if required. Please ensure that any damage is properly recorded and items in respect of which a claim is to be made are not discarded. Be sure to read the policy carefully and be aware of any exclusions and time limits within which claims must be submitted. You should also pay particular attention to any obligations on your part under the insurance policy to take action to preserve the property from further loss and damage. Failure to comply with this obligation or any other obligation under the insurance policy may negatively impact your ability to claim.

Property Reconstruction

Many homes and other properties in the BVI sustained significant damage and many property owners will have repair and refurbishment of their properties at the forefront of their mind. Some property owners will consider this to be a good opportunity to remodel or extend their homes. Owners that hold their properties pursuant to a Non-Belongers Land Holding Licence are reminded to review their Non-Belongers Land Holding Licence carefully before undertaking such work. It would be typical for such Non-Belongers Land Holding Licences to be subject to a condition that any alterations to the property (which would result in the property no longer matching the description in the Non-Belongers Land Holding Licence) will require the prior consent of the Cabinet of the Virgin Islands.

Where a Non-Belongers Land Holding Licence has been issued subject to a development commitment and that development commitment is no longer achievable in the original timescale as a consequence of the storms, the holder of the Non-Belongers Land Holding Licence should apply to the Ministry of Natural Resources for an appropriate extension.

Property Rental

While vacation rental demand is likely to be affected by the storms, there is likely to be increased local demand for homes as well as commercial properties that were spared damage by the storms. Leaseholders are reminded to check their leases carefully before giving up possession of their properties to third parties as it would not be unusual for the lease under which the property in question is held to contain restrictions on alienation or otherwise parting with possession.

Owners that hold their properties pursuant to a Non-Belongers Land Holding Licence are reminded to ensure they have the requisite rental permission before they rent their properties. Rental permission is typically found either in the Non-Belongers Land Holding Licence or in a letter issued by the Ministry of Natural Resources and Labour. Where the owner does not have rental permission, an application may be made to the Ministry of Natural Resources and Labour for rental permission.

Landlord and Tenant

If you need to rent alternative commercial premises or a home because of damage caused by the storms, you should ensure that the lease under which you are occupying is appropriate for your needs, does not contain any onerous terms and can be terminated when the original premises are once again habitable, so that you are not in the position of having to pay for two premises for longer than is necessary. Some policies of insurance allow the policy holder to recover the cost of renting alternative accommodation where the insured premises are rendered uninhabitable. If this is the case you should ensure to retain copies of any receipts so that these may be submitted as part of the claim.

Depending on the nature of the damage sustained and the wording of the lease, a tenant may be entitled to terminate the lease and/or a reduction in the rent payable during such time as the premises are unfit for occupation and use. Tenants should also check the terms of their leases carefully to understand who is responsible for carrying out any repairs to the premises following damage by the storms.

Customs Duty

To assist the recovery effort, the Government has recently enacted measures to reduce to zero the customs duty payable in relation to the importation of certain items, including the following:

Food;

Generators;

Books, clothes and shoes;

Building materials;

Electrical and plumbing fixtures and materials;

Ships, boats and floating structures;

Vehicles, parts and accessories; and

Household furniture and appliances.

This measure was introduced by the Customs Management and Duties (Amendment of Schedule 4) Order, 2017 and will apply from 3 October 2017 until 31 December 2017. Items that are imported into the British Virgin Islands typically attract customs duty at a rate between 5 per cent and 20 per cent depending on the nature of the item in question and this measure therefore presents the opportunity for a significant saving. Where relevant, it is therefore advisable to file insurance claims promptly so that funds will be available to take advantage of the temporary concession with respect to customs duty.

Employment and Immigration

Many employers will have been negatively impacted by the storms, at least on a short-term basis and may have a requirement for their staff to work flexibly until any damage can be rectified and in this context, employers are reminded to have regard to the Labour Code which protects the rights of employees. Some employers may have a requirement for certain members of staff to work additional hours to assist with the recovery process. The Labour Code sets out detailed rules that are particularly relevant for staff working increased hours including in relation to the payment of overtime, rest periods and limitations on hours of work. An understanding of the work permit application process will be essential where additional staff with specialist skills are required to assist with the recovery process and appropriate staff are not available locally.

The Labour Department has announced that work permit applications for certain workers will be expedited, particularly those involved in the relief effort. In relation to existing work permit holders, the Government has announced that there will be a grace period of up to three months for the holders of work permits to regularise their immigration status following the expiry of their work permits. This will be of particular help to many of those work permit holders that are temporarily away from the BVI.

Banks

The retail banks operating in the BVI have announced customer assistance programmes whereby there is an option to defer loan payments for a fixed period of time. Some of these assistance programmes automatically apply but others need to be applied for and we suggest that you contact your bank to ascertain if this is something that is appropriate for you.

For more information on legal matters arising from the impacts of Hurricanes Irma and Maria, please contact Sheila George, Johann Henry, or your usual Harneys contact.

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BVI continuations and discontinuations
Tue, 03 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-continuations-and-discontinuations/
http://www.harneys.com/insights/bvi-continuations-and-discontinuations/
One of the many flexible features of the BVI Business Companies Act 2004 (the BC Act) is the ability both to continue a foreign company as a BVI company under the BC Act and also to continue a BVI company under the laws of another jurisdiction (commonly referred to, respectively, as a continuation and a discontinuation or continuation out). This guide provides a brief overview of the process and requirements for continuations and discontinuations.

General requirements to continue in the BVI

Broadly, to continue as a BVI company a foreign company must:

Be permitted to continue in the BVI under the laws of its jurisdiction of incorporation (the Old Jurisdiction)

Not (a) be in, or be the subject of any undetermined court application for, liquidation or equivalent insolvency proceedings in any other jurisdiction; (b) have a receiver or manager appointed in relation to any of its assets; or (c) have entered into an arrangement with creditors that has not been concluded

An application is then filed in the BVI, together with supporting documents (including evidence of approval of both the continuation and also the company’s new memorandum and articles of association (MAA)). These must be approved (a) by a majority of directors or persons exercising the powers of the company or (b) in the manner established for exercise of the company’s powers.

If satisfied, the BVI Registrar of Corporate Affairs (the Registrar) shall issue a certificate of continuation confirming the incorporation of the company under the BC Act. However, the Registrar may refuse any continuation she believes would be contrary to the public interest.

General requirements to continue out

Broadly, in order to continue out a BVI company must:

Be in good standing (that is, up-to-date with government fees and not struck-off)

Be permitted to continue out under its MAA

Subject to any specific approvals required under its MAA, resolve to continue out by a board or shareholder resolution

File a declaration, via its BVI registered agent, confirming that the laws of the relevant foreign jurisdiction (the New Jurisdiction) permit the continuation and that the company has complied with them

If satisfied these requirements have been complied with, the Registrar will issue a certificate of discontinuance, following which the company will be struck-off in the BVI and ceases to be a company under the BC Act.

Practical considerations

In practice, BVI counsel will need to consider the requirements of the Old or New Jurisdiction (as applicable) in advance with overseas counsel. For example, the laws of that jurisdiction may impose additional legal formalities (such as a BVI legal opinion). On a continuation in the BVI, the Registrar may rely on a formal director’s certificate to satisfy herself that the BVI requirements have been met but this must be duly legalised under, and include an extract of, the relevant laws of the Old Jurisdiction. On a continuation out of the BVI, the Registrar must be provided with proof that the company has complied with the laws of the New Jurisdiction and, whilst this is often in the form of a certificate of registration, or equivalent document, the Registrar may also rely on a provisional certificate of continuance to allow her to issue the BVI certificate of discontinuance.

The timings of the various filings will also need to be carefully co-ordinated. In particular, it is usually desirable to ensure “same-day” treatment of the continuation or discontinuation (to avoid the company’s existing at the same time under two different company laws and any resulting conflicts of laws or other issues).

On a discontinuation, if a charge or other security interest (a charge) is registered publicly in the BVI in respect of the company’s property which has not been released or satisfied, it must first make a written declaration to the Registrar. The declaration must state either:

That a notice of satisfaction or release has been filed and registered in respect of the charge

If such a notice has not been filed and registered, that the holder of the charge (the chargee) has been notified in writing of the intention to discontinue and has consented or not objected

If the chargee has not so consented or has objected following notice, that the chargee’s interest secured by the charge shall not be diminished or compromised by the discontinuation and, broadly, will continue to be a liability recognised under the relevant provisions of the BC Act (see below)

Effect of continuations and discontinuations

Broadly, under the BC Act, the effect of a continuation or discontinuation is as neutral and seamless as possible and the relevant company is regarded as one and the same legal entity. From the date of continuation in the BVI, a company is subject to the BC Act and its new MAA and, under BVI law, is no longer treated as incorporated in the Old Jurisdiction. On a discontinuation, from a BVI law perspective, a company will not cease to be subject to BVI law until a certificate of discontinuance is issued.

Broadly, the BC Act provides that (a) the company continues to be liable for all of its obligations that existed prior to its continuation or discontinuation; (b) the continuation or discontinuation does not impair or release any such liabilities or obligations or any judgments or claims against the company; and (c) any pending or actual proceedings by or against the company remain unaltered.

It should be noted that, in the case of a BVI company that has been discontinued, service of process may continue to be effected on its BVI registered agent in respect of any claim, debt, liability or obligation of the company during the period of its existence under the BC Act.

Conclusion

The BVI is the world’s leading incorporation jurisdiction due to the clarity and flexibility of its company law. The ability to continue a foreign company as a BVI company or to continue a BVI company as a company under the laws of another jurisdiction quickly and seamlessly is just one example of this flexibility and is particularly useful in the context of corporate reorganisations.

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Cyprus signs double tax treaty with Luxembourg
Tue, 03 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/cyprus-signs-double-tax-treaty-with-luxembourg/
http://www.harneys.com/insights/cyprus-signs-double-tax-treaty-with-luxembourg/
After ten years of negotiations Luxembourg and Cyprus signed their first Double Tax Treaty (theTreaty) on 8 May 2017. The Treaty is pending ratification by both contracting states. Should it be ratified by both parties before the end of 2017, the Treaty will take full effect on 1 January 2018.

Like most Double Tax Treaties, the Treaty complies with the Organisation for Economic Co-operation and Development Model Tax Convention for the Avoidance of Double Taxation (theOECD Model Convention), including two slight adjustments. These adjustments include:

A preamble, which clarifies that the Treaty is not designed to create possible opportunities for non-double-taxation, or any form of reduced taxation through evasion, or avoidance; and

A principal purpose test based anti-avoidance rule, in order to avoid “treaty abuse”, whereby one of the contracting states were to acquire benefits unjustifiably.

The Treaty requires no clause for the assistance of the collection of taxes, since both contracting states are members of the EU, thus being subject to EU Directive 2011/16/EU on administrative cooperation. In addition, the exchange of information between the two parties complies with Article 26 of the OECD Model Convention verbatim.

Taxes covered

The specific taxes which the Treaty covers are as follows:

Luxembourg:

Income tax

Corporation tax

Capital gains tax

Communal trade tax

Cyprus:

Income tax

Corporation Income tax

Capital gains tax

Special Contribution for Defence of the Republic tax (SCD tax)

Permanent establishment

Article 5 of the Treaty defines a permanent establishment and is identical to the corresponding article of the OECD Model Convention.

Income from immovable property

The article on income from immovable property reproduces the corresponding article of the OECD Model Convention. It provides that income from immovable property may be taxed in the contracting state where the property is situated.

Residence

Provisions for determining the residence of individuals, resident in both countries, are the same as in the OECD Model Convention. These include permanent home and centre of vital interests, country of habitual residence and nationality, in descending order. If none of these criteria are decisive, residence is settled by mutual agreement between the two countries' tax authorities.

For legal persons, residence is the place of effective management.

Business profits

The profits of an enterprise are taxable only in the contracting state in which it is resident unless it carries on business in the other contracting state through a permanent establishment there, in which case the profit attributable to the permanent establishment may be taxed in the contracting state in which it is located.

Dividends

The withholding tax rates on dividends have been reduced to zero per cent in the case when there is at least ten per cent participation by a tax resident company. However, this increases to five per cent of the gross amount in all other cases. In terms of interest payments, there are no withholding tax rates, much like royalty payments, where it is also zero per cent as long as the recipient of the royalties is in fact, the beneficial owner of the income.

Elimination of double taxation

With regards to elimination of double taxation the exemption method shall be used in Luxembourg, whereas like most double tax treaties, in Cyprus, it shall be done through the credit method, with credit being limited to the part of the taxa priorito the income concerned.

Additional comprehensive clauses have also been added, which regulate the taxation in the field of offshore activities, including exploitation and exploration activities. These additional provisions have been adopted to warranty each contracting state’s rights under these circumstances.

Capital gains

Moreover, the taxation of capital gains state that:

Any gains derived by a resident of one of the contracting states, from the alienation of immovable property (or movable, if associated with a permanent establishment) which is situated in the other contracting state may be liable to tax in the country in which the property itself is situated.

Any gains derived from the disposal of shares in a business organisation, which acquire more than 50 per cent of their value from immovable property situated in the other contracting state, may be taxed in the contracting state in which the property is situated.

Any gains derived from the alienation of any other form of property are liable to tax only in the contracting state in which the alienator is a resident of.

Offshore activities

The Treaty includes comprehensive provisions intended to ensure that each state's taxation rights in respect of offshore activities are preserved in circumstances where they might otherwise be limited by other provisions of the Treaty.

A person carrying on offshore exploration or exploitation activities in one contracting state to the territory (including the territorial sea or exclusive economic zone) of the other for an aggregate of 30 days or more in any 12 months is deemed to be carrying on business through a permanent establishment there.

The Treaty also includes rules for determining when the 30-day threshold is exceeded in respect of offshore activities undertaken by associated enterprises. Profits from maritime or air transport, towing, mooring, refuelling and similar activities in connection with off shore exploration and exploitation of resources are taxable only by the country of which the enterprise concerned is a resident.

With regards to the employment income, the provisions are modified to the effect that remuneration derived by a resident of one contracting state employed in offshore activities in the other may be taxed in the second state. However, if the employer is not a resident of the second state and the employment amounts to less than 30 days in any 12-month period starting or ending in the fiscal year concerned, the remuneration is taxable only by the country of residence of the employee. Salaries, wages and similar remuneration derived from employment aboard ships or aircraft engaged in off shore supply and similar activities are taxable in the contracting state in which the enterprise carrying on the activities is resident.

Exchange of information

With regards to exchange of information, the Treaty reproduces Article 26 of the OECD Model Convention verbatim.

Abuse of any exchange of information in Cyprus is safeguarded by the provisions of the Assessment and Collection of Taxes Law. Requests for exchange of information are solely dealt with by the International Tax Relations Unit (ITRU) of the Tax Department. Exchange of information may take place only via the ITRU: direct informal exchange of information between tax officers bypassing the competent authority is prohibited. The authorities requesting the information must already have a strong case even before they request the information. Accordingly, it will not be possible to follow up a suspicion without first gathering significant evidence. Moreover, the written consent of the Attorney General is required before any information is released to an overseas tax authority.

Entry into force and termination

The agreement will enter into force when the two governments inform one another that the requisite constitutional procedures have taken place. Its provisions will have effect in both contracting states from the beginning of the following year. It will then remain in force until terminated. Either country may terminate the agreement by giving written notice of termination through diplomatic channels of at least six months no earlier than five years after the agreement enters into force. The agreement will cease to have effect from the beginning of the following calendar year.

Conclusion

The Treaty bodes well for both parties, and upon ratification, it shall enhance trade and encourage economic growth of both contracting states. The Treaty will increase Cyprus’ popularity as a preferred destination for any form of foreign direct investment coming from Luxembourg and other European nations, investments which are part of a larger collective investment vehicle put in place, which is strictly regulated, and is compliant with the protocol of the OECD Model Convention.

It seems that 2017 will go down as the year of the ICO. Whilst still not mainstream, the pool of people in the financial services sector who have never heard of Bitcoin, cryptocurrencies, the blockchain or an initial coin/token offering (ICO) is diminishing quickly. For lawyers across multiple jurisdictions this has meant scrambling to firstly try to understand this rapidly evolving technology and secondly to work out how this technology fits within laws and regulations that were for the most part, drafted without thought or reference to the technology.

Here is what we currently see as the primary legal and regulatory considerations for structuring an ICO through the Cayman Islands. For context, we are viewing an ICO as an alternative method of fund raising for a project on a blockchain network through the acceptance of fiat or cryptocurrency in exchange for tokens associated with the project; these tokens may themselves be tradable.

Structuring an ICO through the Cayman Islands

As alluded to in the opening paragraph, there is an element of legal and regulatory drag in the Cayman Islands. No ICO specific related guidance has of yet been issued by the government or regulator. This is not because of any complacency or lack of will, quite to the contrary. Rather, in seeking to retain the reputation of the Cayman Islands as a leading international finance centre, the government and the regulator in consultation with the private sector wish to ensure that any initiatives aimed at blockchain technology and the associated industry are well thought out, effective and business friendly whilst safeguarding the reputation of the jurisdiction by meeting international standards. As such, we are confident that the clarification of existing legal and regulatory uncertainties is imminent.

Where an ICO is structured through the Cayman Islands, the choice of vehicle is currently a Cayman Islands exempted company (an ICO Company). In other jurisdictions, we have seen foundations used. The Cayman Islands will shortly be introducing a foundation company, which will be an orphan vehicle; by bringing into force the foundation company regime. If ownership and autonomy are concerns for the ICO team, they can be addressed to a certain degree by having a Cayman Islands charitable trust or STAR trust hold all the shares in issue of the ICO Company. A Cayman Islands STAR trust is a non-charitable purpose trust that can hold assets for a specific purpose.

Primary Legal and Regulatory Considerations

As things currently stand, the following Cayman Islands statutory and regulatory regimes must be considered when structuring an ICO through the Cayman Islands:

The Money Services Law (the MSL)

The MSL regulates “money services businesses” in the Cayman Islands. Such businesses include the business of providing (as a principal business) money transmission and currency exchange. Currently, the applicability of this law will depend upon the specifics of any ICO. While any specific ICO may, by its nature, fall within the remit of the MSL, we are of the view that the MSL is unlikely to apply to most ICOs.

The Securities Investment Business Law (the SIBL)

Under the SIBL, a person shall not carry on or purport to carry on securities investment business unless that person holds a license granted under the SIBL or is exempt from holding a license. The definition of “securities” and what constitutes “securities investment business” is set out in the SIBL. Briefly, “securities” are defined through a list of instruments common in today’s financial markets and as one would expect, there is no specific mention of digital tokens or cryptocurrencies. “Securities investment business” is defined through a list of activities, being dealing in securities, arranging deals in securities, managing securities and advising on securities.

The SIBL contains a list of “excluded persons” who are exempt from the requirement to hold a license and a list of activities that do not constitute securities investment business for the purposes of the SIBL. Taking these into consideration, it is possible for a token to be classified as a security but for the ICO Company not to be caught by the SIBL.

Each ICO will need to be evaluated on its merits and in our view there are a large number of ICOs where the SIBL will not be applicable. Most notably (but not exclusively) with ICOs involving so called usage/utility tokens.

The AML Laws need careful consideration with respect to all Cayman domiciled ICOs. Part of this is because of the regulatory drag mentioned above. The Proceeds of Crime Law has general application to all Cayman domiciled entities. The Anti-Money Laundering Regulations, 2017 and existing guidance notes focus primarily on the regulated sector in Cayman and prescribe certain policies and procedures to be put in place by Cayman regulated entities (being those undertaking “relevant financial business”, which definition is fairly broad) with respect to money laundering.

Given the general application of the Proceeds of Crime Law we would caution any ICO team against thinking that if their intended ICO falls outside the ambit of the Anti-Money Laundering Regulations they don’t need to concern themselves with anti-money laundering issues. Whatever the final determination is, we believe that there are solutions available in the market to mitigate against any ICO Company from falling foul of the AML Laws.

The Mutual Funds Law (the MFL)

The MFL should not be a concern where the ICO is not intended to be an investment fund or engage in investment fund activity. If the ICO is related to an investment fund or investment fund activity, the proposed structure needs to be considered in the context of the Mutual Funds Law. Given the current definition of “equity interests” in the Mutual Funds Law (which is a key determining factor as to whether an entity qualifies as a “Mutual Fund”) our view is that most ICO Companies (as distinct from any blockchain/cryptocurrency asset class focused fund) should not be impacted by the Mutual Funds Law.

FATCA and the Common Reporting Standards (AEOI)

AEOI relates to the automatic exchange of information between jurisdictions to combat tax evasion. A detailed explanation of the same is beyond the scope of this article; safe to say that this should not be an issue for so called usage/utility tokens.

Beneficial Ownership Regime

Again any detailed consideration of this regime is beyond the scope of this article. Very briefly, considerations around share ownership, voting rights, the right to remove a majority of the board of directors and the exercise of significant influence and control over an ICO Company will play a part in determining who needs to be recorded on the register. With this in mind, we do think that it is relatively straight forward to ensure that the identity of ICO token holders will not need to be maintained on any beneficial ownership register of an ICO Company.

Electronic Transactions Law (the ETL)

Regard should be had to the ETL when preparing the terms and conditions/purchase agreement relating to the ICO and the acceptance of such terms and conditions/purchase agreement.

Conclusion

The Cayman Islands are seeing an upsurge in ICO related business and structuring an ICO through the Cayman Islands should remain an attractive proposition, certainly where the ICO is well thought out and the ICO team are properly advised.

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The emergence of senior shares
Sun, 01 Oct 2017 00:00:00 +0100
http://www.harneys.com/insights/the-emergence-of-senior-shares/
http://www.harneys.com/insights/the-emergence-of-senior-shares/
In this Q&A published by HFM Week in its 2017 Hong Kong special report, Marc Parrott reflects on recent developments within Hong Kong's hedge fund space, and the increasing prevalence of senior / junior share class structures. ]]>
BVI exempts certain categories of people from work permit requirements
Wed, 23 Aug 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-exempts-certain-categories-of-people-from-work-permit-requirements/
http://www.harneys.com/insights/bvi-exempts-certain-categories-of-people-from-work-permit-requirements/
The BVI Government has enacted a measure which exempts various categories of people from the need to obtain work permits. In particular the exemption for directors visiting the BVI for board meetings is significant in supporting the BVI’s position as the leading corporate domicile in the global economy.

In July we reported the Statutory Rates, Fees and Charges (Amendment of Schedule)(No 2) Order 2017 which changed the fees payable for work permits, including a new fee for temporary work permits. Today we report the Labour Code (Work Permit Exemption) Order 2017 which excludes certain categories of people from the need to obtain work permits.

The following categories, described in summary form, are exempt from the need for a work permit for 7 days in the first instance with extensions based on a request for extension:

Directors and other officers of companies (whether incorporated in the BVI or elsewhere) visiting the BVI for the sole purpose of participating in meetings of the board of directors of such companies

Persons visiting BVI business persons for business deals and negotiations. Note that this does not include foreign lawyers not admitted to practise in or holding a valid practising certificate in the BVI

Persons attending business-related events (meetings, conferences, etc) put on by BVI entities (whether government or private). This includes paying participants but also the persons putting on the conference

Persons acting as expert witness in both court and arbitration proceedings.

For all the above, the relevant BVI entity must produce an invitation letter stating the person’s work title, date of expected arrival, the duration of their stay and purpose of their visit and a statement of the fees charged or to be paid to anyone to be exempted. This letter must be presented to the Immigration Officer at the port of entry. The BVI entity must also collect and pay any tax payable on such fees. Where there are large groups of exempted persons (for example at a conference), a notification of the activity and a list of persons exempted is acceptable instead of individual letters.

BVI entities found to “misuse or abuse” the exemption provision are punishable by a penalty of up to US$5,000.

The Order came into force on 21 July.

If you have questions on this measure please contact Sheila George, Johann Henry or your usual Harneys contact.

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Cayman Islands: New intellectual property regime
Thu, 17 Aug 2017 00:00:00 +0100
http://www.harneys.com/insights/cayman-islands-new-intellectual-property-regime/
http://www.harneys.com/insights/cayman-islands-new-intellectual-property-regime/
The Trade Marks Law 2016, the Patents and Trade Marks (Amendment) Law 2016 and the Design Rights Registration Law 2016 came into force on 1 August 2017, introducing a new intellectual property regime in the Cayman Islands.

Trade Marks

Under the previous legislation, trade mark protection in the Cayman Islands was obtained by extending the rights of a UK or EU registered trade mark. The Trade Marks Law 2016 establishes a stand-alone trade mark registration system for the Cayman Islands which no longer allows for the extension of UK or EU registered trade mark, and provides its own system of registration.

A local register of trade marks will be maintained by the Cayman Islands Intellectual Property Office (Register).

Trade marks recorded in the Cayman Islands prior to 1 August 2017 will be transferred to the Register and deemed registered under the new law until their renewal date under the previous legislation. Series marks will also remain protected until their next renewal date at which time they must be registered under the Cayman Act individually.

A trade mark proprietor must appoint a local registered agent to transact business with the Registry.

Patents

The Patents and Trade Marks (Amendment) Law 2016 eliminates all reference to trade marks. Unlike the new trade mark regime, there is no local registration process for patents. Protection of patent rights continues by way of extension of the UK or EU registration.

The new law prohibits the assertion of patent infringement in bad faith and provides remedies for aggrieved parties.

Design Rights

The Design Rights Registration Law 2016 allows existing registered UK and EU design rights to be extended to the Cayman Islands affording owners the equivalent rights and remedies as in the UK or EU. All extension applications must be made by the registered design right owner’s duly appointed registered agent.

Harneys is a registered intellectual property agent affiliated with CIIPO and is able to assist with all aspects of protecting intellectual property rights in the Cayman Islands.

For further information please contact the author.]]>
The Pacific Andes saga: Forum shopping, Chapter 11 and just and equitable winding up
Mon, 07 Aug 2017 00:00:00 +0100
http://www.harneys.com/insights/the-pacific-andes-saga-forum-shopping-chapter-11-and-just-and-equitable-winding-up/
http://www.harneys.com/insights/the-pacific-andes-saga-forum-shopping-chapter-11-and-just-and-equitable-winding-up/
‘Forum shopping’ is the practice of choosing the most favourable jurisdiction in which a claim could be heard. It is often used as a pejorative, a form of jurisdictional gamesmanship, but, in principle, there is nothing wrong in seeking to have the case heard in the forum which is most favourable to the client. It can however lead to some fierce jurisdictional battles particularly in insolvency where the choice can be stark between debtor and creditor friendly procedures.

That is precisely the scenario with which the BVI Commercial Court has been wrestling over the past 10 months in a series of liquidations of subsidiaries of the troubled Pacific Andes Group. Is it best for a national court to decline to apply its own insolvency procedures in favour of another jurisdiction and if so in what circumstances?

To recap, Pacific Andes Resources Development Limited (Bermuda)(PARD) is a public company incorporated in Bermuda and listed on the Singapore Stock Exchange. Pacific Andes International Holdings Limited (PAIH) is also incorporated in Bermuda and listed on the Hong Kong Stock Exchange though trading in the shares is suspended.

At one stage the Pacific Andes Group was said to hold the 12th largest fishing fleet in the world. PARD together with its subsidiary, China Fisheries Group Limited and 14 other subsidiaries after several difficult years filed for Chapter 11 protection in July 2016. Substantial sums are involved not least the US$650 million in unsecured loans to the Club Lenders. It is estimated that some US$2.8 billion in value needs to be generated to repay the creditors and the equity holders.

The circumstances under which the Group filed for Chapter 11 are noteworthy. By filing for Chapter 11, the Pacific Andes Group, according to the Club Lenders, breached various undertakings and removed the Chief Restructuring Officer appointed by agreement between the Lenders and the Group. In an audacious move, the Group simultaneously filed for Chapter 11 protection in relation to 16 Group entities having deliberately concealed its intention from the Lenders and the Chief Restructuring Officer.

The Group had no trading connection with New York or the US generally. None of the Debtors were incorporated in the US and the only asset in New York was the lawyers’ retainer for the obtaining of the relief itself. There was no other connection with the US save for the Group’s desire to take advantage of the debtor friendly environment. A fundamental tenet of Chapter 11 is that the debtor remains in possession and the process therefore enables the debtor to retain management control while it formulates a plan for creditors. The Club Lenders had however lost all confidence in the ability of the Chapter 11 debtors to manage the business. Despite opposition from the Group, the Lenders succeeded in appointing a trustee in bankruptcy in the Chapter 11 proceedings.

In the meantime, one of the BVI entities, Pacific Andes Enterprises (BVI) Ltd, became the focus of an investigation in connection with allegations of trade finance fraud. The central allegation is that Pacific Andes Enterprises (BVI) Ltd falsified trading records in order to obtain trade finance. The BVI insolvency process does not involve the debtor remaining in possession. Instead, the BVI Insolvency Act provides for the appointment of liquidators if the creditor can demonstrate either that the company is (a) cash flow or (b) balance sheet insolvent or (c) that it is just and equitable to appoint a liquidator. The appointment of a liquidator is often but not necessarily the death knell of a company. The liquidator provides independent oversight and supervision of the company to obtain the best outcome for creditors which in some rare circumstances might include bringing the company back to financial health.

The Club Lenders were however faced with the difficulty that the filing of a Chapter 11 could be done electronically from anywhere in the world at the press of a button. The Club Lenders therefore decided to apply for the appointment of provisional liquidators before the hearing of the full petition in order to hold the ring. The appointment of provisional liquidators would prevent the filing of Chapter 11 and ensure that there was a level playing field at the time of the petition.

The tactic succeeded and provisional liquidators were appointed over Pacific Andes Enterprises (BVI) Ltd prior to the hearing of the petition. At the petition the Group strongly argued that a holistic restructuring was essential and that it was best for the restructuring to take place in the context of Chapter 11 rather than piecemeal under the supervision of a liquidator.

That submission was wholly rejected by the BVI Commercial Court judge. Apart from the fact that the companies were BVI entities regulated by BVI Company law and therefore it was appropriate for the BVI Courts to have jurisdiction over the companies, the appointment of a liquidator was not inconsistent with the Chapter 11 process. An independent officer of the court was not prevented from engaging in the Chapter 11 process if there was a holistic restructuring on the table which would result in value for the creditors. Indeed, since the appointment of liquidators over the various BVI entities, the liquidators FTI Consulting has kept a line of communication open with the Chapter 11 Trustee as noted in his latest report in April 2017.

Just as the newly adopted JIN Guidelines seek to set out a flexible procedure to assist cross border insolvency, the pragmatic approach of the BVI Commercial Court ensured that the rights of creditors were protected while recognising that international co-operation might be necessary and appropriate under the right circumstances. The form of order which was granted by the BVI Court permitted the liquidators to enter into international protocols to enable them to liaise with foreign insolvency officers subject to the Court’s approval.

There have been two common themes running through the several Pacific Andes Group company liquidations which have been granted in the BVI namely (a) the Group’s argument that the better outcome for all creditors would be a holistic restructuring plan and that the BVI Commercial Court should await the outcome of that restructuring under Chapter 11 and (b) a lack of documentation to provide credible support that the companies were solvent.

As to the first theme, the BVI Commercial Court has consistently held that it is a matter for the BVI Court as the place of incorporation to regulate those companies which are insolvent or otherwise should be regulated by a court appointed officer while recognising that the court appointed liquidator should have the power to liaise with foreign insolvency proceedings if appropriate.

As to the second theme, this was particularly apparent in the application to appoint liquidators over one of the subsidiaries of PAIH, Richtown Development Limited in June 2017. This was described by the Group as a treasury company. In similar fashion to Pacific Andes Enterprises (BVI) Ltd, provisional liquidators were appointed in order to prevent the company filing for Chapter 11. The petition itself was brought by a related creditor company in liquidation. The application for the appointment of a liquidator was made on three grounds, namely that (1) Richtown was cash flow insolvent (2) balance sheet insolvent and (3) that the circumstances, once properly taken in account, were such as to justify a winding up on just and equitable grounds.

Mr Justice Kaye QC held on 2 June 2017 that the application succeeded on all three grounds. His findings in relation to just and equitable winding up are of particular note.

A winding up petition on just and equitable grounds is a rare event but as Farara J (ag) noted in Wang Zhongyong and Union Zone Management Limited (BVIHCMAP 2013 no. 0024), it is “impossible to conceive of the plethora of circumstances and most undesirable to limit the categories” of claims where just and equitable winding up might be appropriate.

The reasons why it was just and equitable to wind the company up as found by Mr Justice Kaye QC were that there was a justifiable lack of confidence in the conduct and management of the company’s affairs. The judge found that the directors were under a duty pursuant to section 98 of the Business Companies Act 2004 to maintain records sufficient to show and explain the company’s transactions and which will at any time enable the financial position of the company to be determined with reasonable accuracy.

Instead the judge found that there was no explanation of the multiplicity of transactions and that the failure to maintain the documents so as to give raise to an allegation of fraud was serious misconduct on the part of the directors as to give rise to the just and equitable basis. The judge emphasised that he was not making a finding of fraud on the part of the company but in circumstances where the allegation of fraud had been circulating for some time, it was incumbent on the directors to make sure that they had sufficiently accurate records to provide to the court.

Insofar as forum shopping is concerned therefore, to paraphrase Lord Denning, the BVI is a good place to shop in. The pragmatic approach of the BVI Commercial Court ensures that to the extent a BVI company is affected by a Chapter 11 restructuring, the court appointed liquidator has the power to liaise and agree protocols if the plan is likely to achieve value for the creditors. On the other hand, it demonstrates that the BVI Commercial Court will not merely delegate its supervisory powers. The power of the provisional liquidator to ensure a level playing field and prevent a company entering into Chapter 11 is a useful protective power in the appropriate circumstances. Finally, the BVI Commercial Court has demonstrated that it will not shy away from placing a company into liquidation on just and equitable grounds if it is appropriate to do so including a new category namely where there has been a failure on the part of a director to maintain proper records.

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IHT update: UK Government confirms effective date of proposed changes to UK non-dom tax rules
Mon, 24 Jul 2017 00:00:00 +0100
http://www.harneys.com/insights/iht-update-uk-government-confirms-effective-date-of-proposed-changes-to-uk-non-dom-tax-rules/
http://www.harneys.com/insights/iht-update-uk-government-confirms-effective-date-of-proposed-changes-to-uk-non-dom-tax-rules/
The recent UK election and related legislative changes have delayed implementation of new rules imposing inheritance tax on UK residential property held in offshore structures. However, on 13 July 2017, the UK Government announced that the new rules will be included in the next Finance Bill due to be published in September and, importantly, also confirmed that the changes will have retroactive effect from 6 April 2017.

Background

Changes to the UK tax treatment of UK residential property held in offshore structures by non-domiciled individuals were initially proposed in the 2016 Finance Bill. The changes were expected to be finalised in the 2017 Finance (No 2) Bill prior to 6 April 2017, however, in the busy lead-up to the UK general election in June the proposed changes were removed from the bill.

Those affected by the changes who have yet to review and restructure their affairs, should now take the opportunity to consider whether steps should be taken to mitigate the effects of the impending rule changes by contacting their UK tax advisers.

Individuals

For individuals caught by the new ‘15/20 rule’ at 6 April 2017, it may already be too late. However, those who will be caught from the start of the 2018/19 or subsequent tax years are advised to seek advice now to establish what action should be taken to shelter their assets from UK inheritance tax (IHT).

Offshore companies and trusts will continue to provide a shelter from UK IHT for non-domiciled individuals. Assets (with the exception of UK residential property – see below) settled in trust while an individual is non-domiciled will continue to qualify as ‘excluded property’ for UK IHT purposes even if the settlor subsequently becomes deemed UK domiciled. There are currently no proposals afoot to change this rule.

Many clients chose not to ‘de-envelope’ properties held in offshore structures despite the introduction and subsequent increase in the Annual Tax on Enveloped Dwellings (ATED) charge in order to preserve the IHT shelter provided. It has now been confirmed that the protection from IHT will be removed with effect from 6 April 2017. If the primary purpose of an offshore holding company/trust is to provide shelter from UK IHT, then, taking account the ongoing costs of maintenance and the imposition of ATED charges (which can be significant in relation to high value properties), now is the time to consider un-winding or reorganising the structure.

Harneys has significant experience helping clients to restructure their offshore holdings in preparation for the new rules. Specifically we are able to assist with:

The Cruising Permit (Amendment) Act 2017 amends the Cruising Permit Act. Previously, charter boats had to pay different levels of cruising permit fee depending on the time of year and whether or not the boat was “based in the Territory”. The Amendment Act alters this classification by instead classifying boats as either “home based charter boats” or “foreign based charter boats”. Home based charter boats must now pay a cruising permit fee of $6 per person per day, whereas foreign based charter boats must now pay a fee of $16 per person per day. Previously, cruising fees ranged from $0.75 and $4 per person per day.

“Home based charter boats” are defined as charter boats that, for a period of five months in “any” (ie rolling) 12 month period, must be:

operating in the BVI;

generally maintained in the BVI; and

managed by a company or any other legal entity incorporated, registered or licensed in the BVI

This wording is taken directly from the Amendment Act.

“Foreign based charter boats” are essentially defined as all other charter boats.

Ferries, which are exempt from these fees, are defined as “any vessel plying from one side of a water-way to the other or between places on the same or different islands or territories for the purpose of the carriage of goods or passengers.” This is the same definition contained in the British Virgin Islands Ports Authority Act 1990.

The other statute which was amended, the Statutory Rates, Fees and Charges (Amendment of Schedule) Order 2017, confirms the above cruising permit fees for internal Government purposes.

The new fees will take effect on 1 August 2017.

If you have questions on these two measures and how they apply to your business please contact Sheila George, Johann Henry or your usual Harneys contact.

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Country-by-country reporting: Deadline approaching for Cyprus companies
Fri, 14 Jul 2017 00:00:00 +0100
http://www.harneys.com/insights/country-by-country-reporting-deadline-approaching-for-cyprus-companies/
http://www.harneys.com/insights/country-by-country-reporting-deadline-approaching-for-cyprus-companies/
Country-by-Country reporting is a commitment undertaken by all OECD and G20 countries within the framework of Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting) of the Base Erosion and Profit Shifting (BEPS) initiative. It requires multinational enterprises (MNE) belonging to a group whose annual consolidated revenue equals or exceeds €750 million to report annually in respect of each tax jurisdiction in which they conduct business. In compliance with this, Cyprus signed on 1 November 2016 the Multilateral Competent Authority Agreement for the automatic exchange of country-by-country reports, which was subsequently published as a decree in the Official Gazette on 30 December 2016.

In accordance with the provisions of the decree, (which apply retroactively from 1 January 2016), a Cyprus tax resident company that is the ultimate parent of an MNE group must submit a country-by-country report if the annual consolidated revenue of the group exceeds the set threshold. A Cyprus tax resident company that is not the ultimate parent of the MNE group may still be liable for country-by-country reporting as a “surrogate parent company” if any one of the following conditions are met:

The ultimate parent company is not resident in Cyprus

The ultimate parent company is not required to file a country-by-country report in its country of residence

The country of residence of the ultimate parent company does not have in place an effective automatic exchange of information programme with Cyprus with respect to country-by-country reporting

The country of residence of the ultimate parent company has been reported for systematic failure to exchange information.

If any of the above conditions are met, the Cyprus tax resident company is deemed to be a “surrogate parent company” and it must submit the country-by-country report in lieu of its ultimate parent company. As signatory to the multilateral competent authority agreement on the exchange of these reports, any such report submitted in Cyprus will be exchanged with the tax authorities in the jurisdictions that the MNE group transacts provided the latter are also signatories to the multilateral competent authority agreement.

Importantly, any Cyprus tax resident constituent of an MNE group, whether a company or a permanent establishment, must notify the Cyprus tax authorities with the identification of the reporting entity no later than the last day of the reporting fiscal year of the group. The deadline for the filing of the notification for the first country-by-country report is 20 October 2017.

Cyprus tax resident constituents of an MNE group, whether parent, surrogate or member, must establish appropriate mechanisms to ascertain their eligibility and submit the relevant report and/or notification in the prescribed form by the above deadline.

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BVI enacts legislation to change work permit fee calculation
Tue, 11 Jul 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-enacts-legislation-to-change-work-permit-fee-calculation/
http://www.harneys.com/insights/bvi-enacts-legislation-to-change-work-permit-fee-calculation/
The BVI Government has enacted a measure regarding the fees payable for work permits in the Territory.

The Statutory Rates, Fees and Charges (Amendment of Schedule)(No 2) Order 2017 amends part 45 of the Schedule to the Statutory Rates, Fees and Charges Act 2005 which governs statutory work permit fees. The Amendment Order came into force on 1 July 2017.

Previously, most applicants had to pay a flat fee established by the band of salary they would receive: for example the fee for employees earning between $20,000 and $25,000 p/a was $600, and the fee for employees earning anything over $25,000 was $1,000. This scheme was subject to various exceptions: domestic workers (whose fee was only a nominal sum); employees closely related to persons holding a “controlling interest” in the relevant company; self-employed persons; and a special weekly rate for persons or groups of people engaged in the performing arts.

The Amendment Order replaces the employee flat fee system with an incremental calculation based on salary bands, which in general now assume a higher gross salary. The fees are essentially:

3 per cent of gross annual salary for annual salary up to $25,000

5 per cent of gross annual salary for annual salary between $25,001 and $50,000

7 per cent of gross annual salary for annual salary above $50,001

There is a maximum fee cap of $10,000.

By way of example, a person who earns $100,000 annual salary will pay a work permit fee of $5,500 calculated as follows:

$25,000 calculated at 3 per cent = $750

$25,000 calculated at 5 per cent = $1,250

$50,000 calculated at 7 per cent = $3,500

The Amendment Order also replaces most of the exceptions, keeping only the exception for domestic workers (whose fee is fixed at 1 per cent of gross salary regardless of level). The previous exception for persons engaged in the performing arts is now essentially replaced by a general provision for temporary work permit fees, which are simply a proportionate percentage of the above calculation.

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BVI's new beneficial ownership regime to take effect on 1 July 2017
Tue, 20 Jun 2017 00:00:00 +0100
http://www.harneys.com/insights/bvis-new-beneficial-ownership-regime-to-take-effect-on-1-july-2017/
http://www.harneys.com/insights/bvis-new-beneficial-ownership-regime-to-take-effect-on-1-july-2017/
The BVI has enacted legislation to implement a networked database of beneficial ownership interests in companies incorporated or domiciled in the jurisdiction. The database, known domestically as the Beneficial Ownership Secure Search (BOSS) System, is being rolled out so that the BVI can comply with its obligations under the Exchange of Notes agreement entered into with the UK in April 2016 (UK Exchange of Notes). The UK Exchange of Notes modernises the way in which the BVI competent authorities may gain access to beneficial ownership information of BVI companies.

Beneficial ownership information and the BVI

BVI Registered agents have, for many years, been subject to extensive obligations under anti-money laundering legislation to obtain and keep up to date information about the ultimate beneficial owners (UBOs) of companies that they provide services to. As of the end of 2016, those requirements were further strengthened by requiring registered agents to obtain UBO information on business introduced to them by professional and regulated intermediaries based outside of the BVI.

Under the regime prior to BOSS’s implementation, the BVI Government would extend cooperation with competent authorities based overseas, including in the UK, following the receipt of a legitimate and valid request for information. Typically, this would be a request for UBO or other similar KYC information relating to an ongoing foreign investigation. To comply with the request, the BVI Government would issue a notice to a person in the BVI assumed to be in possession of the underlying information, typically a registered agent. The recipient would then have a short window of time in which to comply with the notice, typically between 24 to 48 hours.

How will BOSS work?

Under the BOSS system, registered agents, though not other BVI institutions, must record basic information about certain UBOs of the BVI companies they administer in the BOSS database. In turn, law enforcement officials in the BVI, in accordance with the UK Exchange of Notes and applicable legislative safeguards, may search that system for the UBO information in order to exchange it with the UK. Each registered agent in the BVI will have and maintain its own database. Information maintained on each database will be confidential to the registered agent and will be accessible externally only by specially designated BVI law enforcement officials.

Access to BOSS is permissible only from a physical location in the BVI and only following a formal request from the BVI competent authorities: the BVI Financial Investigation Agency, the BVI Financial Services Commission, the BVI International Tax Authority and the BVI’s Attorney General’s Chambers. The identity of each designated person competent to search the BOSS database will be publicly gazetted in secondary legislation in due course. The BVI competent authorities may request the designated person to search BOSS solely in order to assist the BVI in complying with its obligations under the UK Exchange of Notes. This would mean that a request would need to originate from the UK authorities before a search of BOSS can take place in the BVI.

What UBO information will be stored on BOSS?

Each registered agent must enter the following basic information for every UBO that is a natural person and meets the following threshold requirements: name; residential address; date of birth and nationality.

The threshold requirement for UBO interests disclosable under BOSS is 25 per cent of the ownership interests (shares or voting rights) in a company. This is in line with the Financial Action Task Force (FATF) benchmark recommendations and the UK’s own public UBO register but represents a relaxation from the equivalent threshold of 10 per cent under the BVI’s anti-money laundering regime (the Anti-money Laundering Regulations 2008 and the Anti-money Laundering and Terrorist Financing Code of Practice 2008 (BVI AML legislation)).

In practice, the necessary UBO information will already be in the possession of the BVI registered agent, so it is unlikely that registered agents will need to materially vary current KYC collection procedures with clients or intermediaries.

Exemptions from disclosure

Any company which is regulated by the BVI Financial Services Commission and any company whose shares are listed on a recognised stock exchange is out of scope. Subsidiaries of BVI regulated funds and listed companies are also exempt.

Additionally, the definition of beneficial owner is limited to persons with a sufficiently ‘fixed’ ownership interest in the company. In this way beneficiaries of a discretionary trust which owns a BVI company may not be considered UBOs where their interest has not been sufficiently vested by the trustee. As too would be the case for third parties with merely a contractual as opposed to a proprietary exposure to the assets or performance of the company.

Security Measures

The BVI Government has employed top-tier cyber security measures in the deployment of the BOSS System in order to develop a rich, yet secure search portal. The standardised data base has been developed with the corresponding objective to protect data sovereignty and the security principles of all industry stakeholders. To this end, leading technological methods have been and will be utilised to ensure continued safety, protection and security of information stored on the BOSS System.

Deadlines

The requirement to exchange information under the UK Exchange of Notes must be complied with on or prior to 30 June 2017. As such, UBO information of all active companies on 30 June 2017 as well as companies struck off the register since 1 January 2016 must be uploaded on to the BOSS system by each registered agent in the BVI on or before 30 June 2017. Thereafter, UBO information must be uploaded on an ongoing basis.

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New revision of trusts legislation in Cayman
Tue, 06 Jun 2017 00:00:00 +0100
http://www.harneys.com/insights/new-revision-of-trusts-legislation-in-cayman/
http://www.harneys.com/insights/new-revision-of-trusts-legislation-in-cayman/
The Trusts Law (2017 Revision) (2017 Revision) was gazetted on 31 May 2017. The 2017 Revision is the first full revision of the Cayman Islands Trusts Law since its 2011 Revision (2011 Revision) and incorporates the Trusts (Amendment) Law 2016 (Amendment Law) which amended and modernised the 2011 Revision.

Along with provisions addressing certain powers and the appointment and discharge of trustees, the Amendment Law introduced a number of retrospective provisions with the objective of correcting technical issues in the original legislation.

Overall, the changes incorporated in the 2017 Revision do not represent a major development in trusts law in Cayman; however the 2017 Revision maintains the Cayman Islands’ commitment to being at the forefront of pioneering and accessible offshore trusts legislation and ensures that it remains a leading jurisdiction for all forms of trust structures, both in the private client and commercial contexts.

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Divided loyalties "the issue of directors" duties in joint ventures
Tue, 30 May 2017 00:00:00 +0100
http://www.harneys.com/insights/divided-loyalties-the-issue-of-directors-duties-in-joint-ventures/
http://www.harneys.com/insights/divided-loyalties-the-issue-of-directors-duties-in-joint-ventures/
Every company lawyer is taught from an early stage that a director owes their duties to the company, and not to the shareholders or any individual shareholder. This is sometimes referred to as the rule in Percival v Wright [1902] 2 Ch 401. In relation to companies which operate as joint ventures, it is relatively common for the parties to provide for individual shareholders to be able to appoint a director to represent their interests on the board. However, as Lord Denning famously pointed out in Boulting v ACTAT [1963] 2 QB 606, 626, a director nominated by a shareholder still owes their duties first and foremost to the company. That general position was recently confirmed by the Privy Council in Central Bank of Ecuador v Conticorp SA [2015] UKPC 11.

It is well known that BVI company law has been modified to allow the parties, if they so choose, to modify the effect of directors duties such that a director nominated by a particular shareholder may exercise their powers in the best interests of the shareholder first, and the company second (BVI Business Companies Act 2004, section 120(4)). This provision has been deployed in a number of high profile joint venture transactions, as well as a multitude of smaller and less famous ones. What has never been satisfactorily resolved by the courts is the degree to which those potentially conflicting duties must be resolved. It is clear that a director will still owe duties to the company, however, it is not clear to what extent those duties may be suborned when the section is invoked and the interests of the company and one of its shareholders come into conflict.

However, even where parties do not put their directors within the ambit of section 120(4), BVI law takes a generally more sympathetic line in relation to directors who look out for the interests of the shareholders directly.

In section 132(2A) dealing with the power of a company to indemnify members of the board, the statute affirms that the power arises so long as the director has acted in the best interests of the company or “a shareholder or shareholders of the company”.

Further, in relation to the power to make administration orders under Part II of the Insolvency Act 2003, the power of the court to make an order depends upon the directors or other applicants being able to demonstrate various grounds, including the “rehabilitation of the company or of one or more companies in a group of companies of which the company is a member” (Insolvency Act 2003, section 76(1)(a)).

Similarly, the BVI Commercial Court has taken what might be seen as a more commercially realistic approach to directors’ duties. In Ciban Management Corporation v Citco (BVIHCV 2007/0301), Bannister J indicated that the court would take a more pragmatic approach when assessing the conduct of a nominee director. That case did not involve a joint venture, so the word ‘nominee’ is used in a different sense from the way Lord Denning used it in Boulting. However, the court affirmed that where the beneficial owner of a company was party to an arrangement where the nominee director was expected to act upon the recommendations of a third party, that same beneficial owner could not subsequently complain about the director doing so. That intuitively feels correct. Further, it is respectfully suggested that the decision can probably be extrapolated: if two parties agree (for example in a shareholders’ agreement) that one or more directors are expected to discharge their roles with reference to a particular person, they should not subsequently be able to argue that this is inappropriate. Furthermore, if the company is a party to that arrangement, either by express agreement or by acquiescence, it should similarly not be entitled to complain.

The role of a director is hemmed in by statutory and fiduciary duties, and people filling that role need to be mindful of a large number of responsibilities when exercising their powers. In relation to joint ventures, it is respectfully suggested that the more flexible and realistic approach to discharging those duties under commercially agreed arrangements is to be preferred over the “forced altruism” of older English common law rules.

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Security registrations in BVI: A closer look at difficult issues
Tue, 30 May 2017 00:00:00 +0100
http://www.harneys.com/insights/security-registrations-in-bvi-a-closer-look-at-difficult-issues/
http://www.harneys.com/insights/security-registrations-in-bvi-a-closer-look-at-difficult-issues/
One of the more popular features of BVI company law is its regime for registering security interests. It is quick, clean and efficient – either party can register security online by merely filing a form with the relevant particulars and paying the relevant fee. Once registered, the priority of the security interest is protected under BVI law, and third parties are deemed to have constructive notice of the security interest. No need to fuss with wet-ink originals, or wrestle with tortuous divisions in relation to classes of registrable charges.

But while the system may work simply and efficiently for 99.9 per cent of security registrations, invariably, there are going to be some difficult issues at the margins. This article takes a closer look at some of those difficult issues which can arise in relation to more complicated structures.

Companies acting as trustees

The BVI company security registration regime is predicated on the fact that the company is granting a charge over its own assets (and section 161(1) of the BVI Business Companies Act explicitly refers to this). What happens where a company, acting as trustee, charges trust assets? Although the company is the legal owner of the assets, the assets are beneficially owned by another party, and do not form part of the balance sheet of the company granting the security. It is clear that – as a matter of practice – it is possible to register such a charge against the trustee company. But is it necessary, and is it effective?

Generally speaking, security registration regimes fall into two types: asset based registers (such as those under the Registered Land Act and the Merchant Shipping Act) and entity based registers (such as the BVI Business Companies Act regime). The basic premise of an asset based register is that you can check a particular asset and, irrespective of who owns it, see if it is subject to an encumbrance. The basic premise of an entity based register is that you are dealing with a particular entity, and so you want to see whether it has granted security over any of its assets such as to affect its creditworthiness. Based upon that consideration alone it might be reasonable to assume that corporate trustees should not register charges over trust property – they don’t affect the creditworthiness of the corporate trustee itself. But that is probably too narrow a view. All of the trust assets will be registered in the name of the trustee, and so if one wishes to ascertain the creditworthiness of the trust, then it seems perfectly reasonable to wish to see what charges the trustee has created over trust property.

There is a further complication. Under the Trustee Act, there is a separate regime for what are called “trustee statutory charges”, which also seeks to regulate priority between security interests. If charges are registrable in both sets of registers, surely that creates a possibility of a conflict of priorities? It might be argued that the trustee statutory charges regime is only voluntary, but then, strictly speaking, so is the company regime. Further, it is not clear that the possibility of conflict is a full answer to anything. If a company grants security over land in the BVI, it should register that security in both the company register and the registered land register – notwithstanding that each provides a separate and distinct priority regime.

There is no decided case providing guidance on this issue, and the best practice remains to register such charges against corporate trustees. At the very least it seems that this should give constructive notice to third parties. But whether or not it confers statutory priority remains an open question, particularly if the corporate trustee has also opted into the trustee statutory charge regime.

Companies acting as general partners

Similar considerations can arise where a BVI company acts as a general partner in a limited partnership. Although the company will often have property registered in its name, it does not hold the property for its own account, but as partner of the partnership. This is particularly popular with BVI limited partnerships, because there is no separate security registration regime which exists for BVI limited partnerships, and secured lenders are often uncomfortable with having no registration at all.

Although the issues are superficially similar to corporate trustees, there are some key differences. Firstly, a corporate general partner will have some interest of its own in the partnership property (albeit probably only a limited interest) unlike a trustee, which typically will have no beneficial interest of its own. Secondly, there is no alternative registration regime as there is for trusts. Accordingly, it would seem that there are stronger reasons for arguing that where a company charges property as a general partner that the security interest should properly be registered under the company charges regime. But as with trusts, there are no decided cases on the issue.

Segregated portfolio companies

Legally speaking, there is nothing complicated about individual portfolios of a segregated portfolio company granting a charge over portfolio assets. After all, the entire segregated portfolio concept is based upon segregation of the assets and liabilities of the different portfolios within the company. The complication arises because the system administered by the Registrar of Companies cannot handle it. Although it is perfectly possible to register a charge against a segregated portfolio company as a whole, it is not possible to register a charge against any of the individual portfolios.

In practice, what tends to happen is that all charges get registered against the company as a whole, but the person who makes the filing usually records on the form R401(S) that the charge is granted by a specific portfolio over portfolio assets. Given that the individual portfolios are remote from each other in terms of liability, no possibility of conflict should arise in any event. It is merely a case of finding a way to navigate around the rigidity in the system to ensure that the security does in fact get registered.

Merged companies

Another area where issues can arise is where two companies who have registered security merge. By law, they then become a single entity and all of the combined assets and all of the combined liabilities aggregate into a single entity. If the two merging companies had created and registered security, in theory the priority between them would then be determined by the order in which they were registered against the predecessor companies. Theoretically, this represents a credit risk for certain types of security. For example, if the two merging companies had each created an all-assets floating charge, the lender who had the second registered floating charge will drop from having first ranking security over the pool of assets in just one company down to a second ranking charge over the combined pool of assets. Unlike the position with continuations, the law does not require the permission of a secured creditor before companies merge. Although most well drafted security documents will prohibit this, if the company does so in violation of the terms of the document then the lender’s remedies for covenant breach may be cold comfort in the event of an insolvency (although it might be able to challenge the merger itself as constituting an unfair preference in the insolvency regime – but that process would be fraught with challenges).

The other particular difficulty which arises in relation to mergers is the records maintained at the Registry. Although in theory the register of registered charges is a single continuous register, the reality is that charges are filed and recorded against individual companies. When two companies merge, the Registrar does not move across the record of registered charges from the merging entities to the surviving companies. Accordingly, unless a person running a search is aware of this and knows to search against the previous constituent companies for registered charges, they may be unaware of a prior security interest.

This leads to yet another complication, which is how to release charges which were registered against a company prior to merger. Once a company has merged, unless it is the surviving entity, it is no longer possible to make filings against that company. Accordingly, if a charge which was created by a non-surviving company prior to the merger is released, there is no way to record the release at the Registry. In these respects, the architecture of the charge registration regime does not work well in relation to mergers and consolidations.

Summary

The BVI’s company charges registration regime is one of the great strengths of its company law. However, although it is very good, it is not perfect. Parties who work on unconventional structures which involve secured finance should ensure that they properly consider all of the relevant issues necessary to protect the legitimate commercial expectations of the parties.

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The company's property - Litigation funding and insolvent companies
Tue, 30 May 2017 00:00:00 +0100
http://www.harneys.com/insights/the-companys-property-litigation-funding-and-insolvent-companies/
http://www.harneys.com/insights/the-companys-property-litigation-funding-and-insolvent-companies/
Tucked away in dusty corners of the Insolvency Act 2003 are two slightly obscure provisions: sections 251 and 257. Those sections deal with various rights of action vested in the liquidator of an insolvent company, and they provide that any proceeds of an action for either a voidable transaction under Part VIII (s.251) or for either insolvent or fraudulent trading (s.257) are “deemed to be assets of the company”. Everyone other than insolvency geeks will be tempted to gloss over that provision and move on. Those seven little words lead to a multiplicity of consequences not often appreciated.

For those two sections, all claims would be rights of action vested in the liquidator rather than being assets of the company. English case law stretching back 80 years suggested that this had three particular consequences:

Firstly, any recovery by a liquidator under those statutory causes of action did not accrue to the company itself, but instead was held on statutory trust for the company’s unsecured creditors (Re Yagerphone [1935] 1 Ch 392). It followed from this that even if the company had an all-assets floating charge which would otherwise catch after acquired property, it would not catch the fruits of these claims because they were never the property of the company - they were only vested in the liquidator personally (contrast for example, the position of misfeasance claims, which are rights vested in the company itself, and are caught by the floating charge - see Re Anglo Austrian Publishing [1892] 2 Ch 158).

Secondly, because those rights of action did not relate to property of the company, it followed that any claims made by the liquidators were not expenses of the winding-up, as expenses of the winding-up were limited to claims to recover the company’s property - not pursuing rights of action vested in the liquidator (see Re MC Bacon (No 2) [1991] Ch 127, Re Floor Fourteen [2001] 3 All ER 499).

Thirdly, and most relevant for this article, because those rights of action were personal to the liquidator, they were not within the scope of the liquidator’s powers to assign claims vested in the company to a third party. Accordingly, an attempt to assign such a claim is void as contravening prohibitions on champerty (see Re Oasis Merchandising Services Ltd [1998] Ch 170).

In relation to the first point (proceedings held on trust for the unsecured creditors), the position under BVI insolvency law remains the same as the common law position. Although those two statutory provisions deem the rights of action to be property of the company, they each further go on to specify that the proceeds are to be “available to pay unsecured creditors of the company”. The wording is perhaps inelegant, but the intent is clear: the proceeds are not caught by a floating charge. However, it is certainly not clear why this should be the case. For example, if the liquidator successfully challenges a transaction at an undervalue, the undervalue is reversed and the money comes back into the company’s estate. The creditor who has suffered the loss as a result of the undervalue transaction is the floating chargeholder, but the recoveries go to benefit the unsecured creditors. The unsecured creditors receive a windfall and actually benefit from misconduct on the part of the company, which is difficult to justify.

In relation to the second point (liquidator’s expenses), the position in the BVI has been modified from the common law. Rule 199(b) indicates that the costs and expenses of the liquidation will include “costs and expenses of any legal proceedings which the liquidator has brought ... whether in his own name or in the name of the company”. This should be wide enough to include claims which sections 251 and 257 refer to.

However, it is the third point (assignment of claims) that is arguably of most interest. Because those claims are deemed to be assets of the company, and because the liquidator is imbued with statutory power to sell company assets as part of the liquidation, it means that the liquidator has power to sell such claims to a claims management company to pursue, and Re Oasis Merchanding should not be followed in the BVI. This is potentially very important as in many liquidations the liquidator simply does not have funds to pursue what may appear to be promising causes of action. The ability to assign claims and utilise litigation funders is a valuable way to swell potential recoveries for the general body of creditors.

To date, there have not been a great many such claims before the BVI courts. That may simply be a function of lack of awareness in relation to the viability of monetising such claims. Certainly directors of offshore companies – on paper at least – make attractive targets, not least because they are often comprehensively insured. They seem like natural targets for types of claims favoured by litigation funders.

It remains to be seen whether more liquidators afford themselves of the opportunity to assign these wider rights of action in the way which is expressly provided for in the BVI legislation - albeit in a highly understated manner.

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Cyprus snapshot: options and advantages
Tue, 30 May 2017 00:00:00 +0100
http://www.harneys.com/insights/cyprus-snapshot-options-and-advantages/
http://www.harneys.com/insights/cyprus-snapshot-options-and-advantages/
Cyprus has been a member state of the European Union since 2004 and one of the top venues for the incorporation and establishment of businesses across Europe.

Cyprus boasts an impressive list of double tax treaties which can be fundamental to tax planning and the establishment of a business. In addition, Cyprus offers impressive infrastructure for businesses looking to set up an on the ground presence. A British dependency until independence in 1960, Cyprus benefits from a legal system based on English common law, and Cyprus courts may look to the judgments of the courts of England and Wales for precedent and reasoning when deciding cases.

Types of corporate entities

Cypriot corporate entities may be formed as private or public limited liability companies by shares and in rare cases companies limited by guarantee which are all incorporated pursuant to the Cyprus Companies Law. A company may also take the form of a European public limited liability company, more commonly known as Societas Europaea or SE.

How is Cyprus similar to the BVI?

Based on English common law

A low cost and tax jurisdiction

Public registration of charges and statutory preference to secured creditors’ rights on insolvency

Documents entered into by Cypriot entities or relating to assets located in Cyprus may be subject to stamp duty if brought into the jurisdiction

EU member therefore regulated jurisdiction

Reciprocal enforcement of judgments from other EU member states

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Key benefits of using BVI structures
Tue, 30 May 2017 00:00:00 +0100
http://www.harneys.com/insights/key-benefits-of-using-bvi-structures/
http://www.harneys.com/insights/key-benefits-of-using-bvi-structures/
This guide highlights the key benefits of using a BVI corporate structure.]]>
Getting financial services licensees in shape for the Caribbean FATF inspection
Thu, 18 May 2017 00:00:00 +0100
http://www.harneys.com/insights/getting-financial-services-licensees-in-shape-for-the-caribbean-fatf-inspection/
http://www.harneys.com/insights/getting-financial-services-licensees-in-shape-for-the-caribbean-fatf-inspection/
The BVI is expected to undergo its fourth round of mutual evaluation by the Caribbean Financial Action Task Force (CFATF) in 2018 based on the Financial Action Task Force’s (FATF) international standards on combating money laundering and the financing of terrorism and proliferation.

Each member country of the FATF and its associated regional bodies is now required to ensure that they can identify and assess the risks associated with money laundering and terrorist financing and take action, including designation of an authority or mechanisms to coordinate the assessment of the identified risks, and apply resources aimed at effective risk mitigation.

In order to effectively manage this process, the BVI Cabinet established the National Risk Assessment Council to serve as the policy-making body responsible for leading the way on significant policy issues in relation to the conduct of the National Risk Assessment (NRA). The National Risk Assessment Steering Group has also been established to act as the central coordinating body for the NRA with full responsibility for the preparation of the NRA framework and the conduct and review of the NRA. This exercise was designed to help prepare the BVI for its 2018 CFATF mutual evaluation, at which time the results of the NRA will play a key role. In addition, the Public Education Committee (PEC) has been established and charged with the task of educating the public on Anti-money Laundering and Countering the Financing of Terrorism (AML/CFT) matters. In accordance with this mandate, the PEC has created a brochure which provides essential information on the NRA exercise, background on the origins and the framework of the FATF and details of the BVI’s legislative framework as regards AML/CFT.

The resulting report of the NRA was issued to participating organisations in the BVI. Risk assessment was conducted on the financial services sector to assess whether local and international AML standards are being met by licensees in the sector.

The BVI Financial Services Commission (FSC) has already commenced a preliminary exercise to ensure that all relevant persons conducting relevant business have complied with the AML/CFT requirements. Specifically, the FSC is testing relevant persons on four of the FATF’s Recommendations, namely:

The development and implementation of policies and procedures that provides for senior management oversight functions to ensure that they are fit for the trust and corporate service providers (TCSP); the functions should be provided in a properly written document and shared with all key staff to ensure consistency of approach in dealing with AML/CFT risks

The development and implementation of control measures (as outlined in section 11 of the Anti-Money Laundering and Terrorist Financing Code of Practice 2008) are reviewed and updated periodically and that its procedures are consistently and regularly used to risk assess its business relationships to identify areas of risk; risk areas identified must be appropriately classified as high or low and appropriate resources channelled to the areas identified as posing high risk in the business relationships

The development and implementation of appropriate record-keeping measures to ensure that relevant data is properly and consistently recorded, readily accessible and easily retrievable

The development and implementation of a training programme on AML/CFT issues to guide its staff in identifying high risk business relationships, identifying red flags in relation to customers and business transactions, and knowing what matters should be advanced to senior management for decision (mere training on the law and principles governing AML/CFT issues without providing an appropriate nexus to the TCSP’s business and how that business may be abused for AML/CFT purposes may create a loophole whereby AML/CFT red flags are missed)

To the extent any relevant person needs assistance with looking at their internal policies and procedures to meet and satisfy the four recommendations above in addition to any internal audit assessments, please do get in touch with us. Harneys’ dedicated Regulatory Department advises on all aspects of BVI regulatory law. We would be happy to assist any stakeholder with a review of their AML/CFT documentation and provide the necessary legal advisory services that may be required to ensure each stakeholder is in compliance with the AML/CFT obligations under applicable law and regulations.

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The global reach of the BVI as an investment funds jurisdiction
Wed, 17 May 2017 00:00:00 +0100
http://www.harneys.com/insights/the-global-reach-of-the-bvi-as-an-investment-funds-jurisdiction/
http://www.harneys.com/insights/the-global-reach-of-the-bvi-as-an-investment-funds-jurisdiction/
The BVI is recognised globally as a leading funds jurisdiction. It has built up this reputation over the course of many successful decades, based upon the essential building blocks of being tax neutral, politically stable and economically secure.

Approximately one quarter of all offshore hedge funds established worldwide over the years have been domiciled in the BVI. This impressive record can be credited to its highly regarded legal system based on well-established and recognised English common law principles, its sophisticated yet user-friendly legislation and its ability to keep up with and be fully compliant with all internationally recognised tax reporting and anti-money laundering standards.

The BVI benefits from a diverse offering of five regulated funds products, which blend together and allow the BVI to be a suitable home for everyone from the start-up manager setting up an incubator fund to an established institutional fund manager with billions under management who may require more of a retail-style platform. In addition, largely as a result of the jurisdiction’s world-class legislation, the BVI is increasingly the domicile of choice for closed-ended vehicles (ie those in the real-estate, private equity and venture capital spaces). Because of the flexibility and sophistication of the relevant legislation, it is also becoming the home for more niche areas such as crypto-currency funds, hybrid funds and crowdfunding platforms.

BVI funds products

The incubator fund: aimed squarely at emerging managers, this category of regulated fund benefits from a fast track launch process, low establishment costs and light touch, intelligent regulatory obligations. It allows managers a two year incubation or “validity” period (with an extension of up to 12 months available) to establish a track record and test an investment strategy. It is restricted to a maximum of 20 investors, each investing at minimum $20,000, and a cap on assets under management of the fund of $20 million, making it ideal for friends and family investors. It is proving very popular internationally for managers currently operating in the managed account space who want to move to the next step of consolidating their investors and developing a track record.

The approved fund: this fund benefits from a similar blend of advantages to the incubator fund and is seemingly becoming the logical choice for smaller managers and family offices. The primary difference is that this fund does not have a validity period and therefore can be operated without a time restriction so long as the assets under management remain under $100 million and the fund has no more than 20 investors. The other main difference is that this type of fund does require an administrator, who can be based anywhere in the world. This has therefore generated a significant level of interest amongst the administration community who have seen the opportunity to effectively use this low cost, flexible fund as a way of bringing smaller clients onto their platform.

The private fund: this long-standing category of regulated fund must either have less than 50 investors or only subscribe for or purchase fund interests on a private basis. Aside from those restrictions, private funds hugely benefit from no minimum investment amount per investor, and no limitation on the total assets under management. This has traditionally made private funds very popular as the most cost-effective way to establish master fund vehicles compared to other jurisdictions, and also for managers looking to simply cater for and maintain a friends and family offering.

The professional fund: this is the BVI’s most popular category of regulated fund: it has been around for over 20 years and will be familiar to readers. There is no restriction on assets under management or number of investors: it is simply limited by the type of investor that may subscribe (“professional investors”) and that the minimum initial investment into a professional fund by each investor is US$100,000 (or equivalent in another currency).

The public fund: this is a retail-style product aimed at managers wishing to solicit a large number of investors, with no restriction on either the categories of investors it may invite to invest in the fund or the minimum investment per investor. Because of this inherent flexibility, it comes with a higher level of regulatory protection but still enjoys a good level of popularity as compared to other similar types of vehicles in other jurisdictions, largely because of the cost and speed to market.

While the majority of investment funds launched in the BVI are established as corporate entities, two other vehicles are proving increasingly popular: the limited partnership and the segregated portfolio company (SPC), a single company limited by shares but offering statutory segregation of assets and liabilities between separate “portfolios”.

Legislative developments

On the limited partnership side, the BVI will soon be enacting an entirely rewritten Partnership Act, ushering in the most innovative and sophisticated limited partnership legislation globally which recognises the best aspects from other equivalent and very successful acts (all the way through from Delaware to New Zealand). This will only add to the popularity of the limited partnership as a vehicle for both hedge – and, more obviously – private equity funds.

On the SPC side, growth in recent years has been centred on the use of approved fund SPCs, which are proving particularly useful for managers operating managed accounts who would like to use a corporate structure for their accounts. Each managed account can be placed into a separate “portfolio”, thereby precluding any risk of cross-contamination between different accounts. They have also found niches for family offices acting for multiple individuals or groups of individuals who require different investment strategies, each of which can be operated through a separate “portfolio” and as platforms for start-up funds.

While SPCs can currently only be approved, private, professional or public funds, as a result of market demand, the BVI will soon enact legislation to extend the use of SPCs for unregulated, closed-ended structures, which will expand their potential use.

These legislative changes, combined with the BVI’s already broad product offering, will add to the BVI’s enduring appeal as a jurisdiction of choice for the establishment of investment funds.

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CRS update: BVI publishes its list of Reportable Jurisdictions
Fri, 12 May 2017 00:00:00 +0100
http://www.harneys.com/insights/crs-update-bvi-publishes-its-list-of-reportable-jurisdictions/
http://www.harneys.com/insights/crs-update-bvi-publishes-its-list-of-reportable-jurisdictions/
On 11 May 2017, the British Virgin Islands (BVI) published its list of Reportable Jurisdictions for the Common Reporting Standards (CRS). A link to the list can be found here.

The BVI International Tax Authority have indicated that this is a provisional list and revisions to the list will be made as agreements are put in place between treaty partners to provide the information required under the CRS.

The list of BVI Reportable Jurisdictions should be distinguished from the list of BVI Participating Jurisdictions. The list of BVI Participating Jurisdictions can be found here.

The MOU represents another way that the authorised competent authorities in the participating jurisdictions can cooperate in relation to the exchange of information.

Under the MoU the various competent authorities of the participating jurisdictions agree to provide mutual assistance and exchange of information to enable the competent authorities to perform their duties and functions effectively according to the domestic laws and regulations of their home jurisdictions.

The MoU also includes a framework of roles and requirements of such authorities, in order to achieve effective regulation and supervision and to make provision for confidentiality rules regarding the sharing and exchange of information.

The jurisdictions participating in the MoU include Bermuda, BVI, Cayman Islands, Gibraltar, Guernsey, Isle of Man, Jersey, and all other GIFC members. The BVI FSC signed the MoU on 8 May 2017.

In this note, we examine briefly some of the important sections of the MoU.

Requests for information

The MoU does not affect the abilities of competent authorities to obtain information from persons on a voluntary basis provided that the proper procedure is followed in the jurisdiction of each competent authority. Where a request is made under the MoU, the requesting authority can make a request for assistance or information by electronic communication attaching a scanned original signed document addressed to the FSC's contact person referred to in Appendix C of the MoU. The FSC could ask that the original signed request be sent by post. If the request complies with paragraph 5 then any request for the original should not delay the commencement of work on it. The request to the FSC under the MoU would need to contain the following information:

A description of both the subject matter of the request and the purpose for which the assistance or information is sought

A description of the assistance, documents or information sought by the requesting competent authority

Any information in the possession of the requesting competent authority that might assist the requested competent authority ie the FSC in identifying the person believed by the requesting competent authority to possess the information sought, or the places where the requested competent authority may obtain such information

The legal provisions concerning the matter that is the subject matter of the request and the relevance of the requested assistance or information to the specified laws and/or regulations

The names of any third parties to whom the requesting competent authority is bound to or expects to release the requested information

To the extent that a person i.e. a natural person, body corporate, partnership or unincorporated association, government or political subdivision, agency or instrumentality of a government receives a request under the MoU such a person can deny the request under the following grounds as set out in paragraph 10 of the MoU where:

The request would require the requested competent authority to act in a way that would violate the law and regulations of the jurisdiction of the requested competent authority

The request is not in accordance with the provisions of the MoU

Corresponding assistance would not be given in the country or territory of the requesting competent authority

On grounds of public interest

Above all, notwithstanding any of the above, the applicable rule of law must be followed in the participating jurisdictions and to the extent a person who have received a request under the MoU feels that their rights may be infringed then there is always recourse to the courts to seek a remedy at law.

Execution of requests

Where the requested competent authority is satisfied that assistance should be given it will provide the information held in the files of the requested competent authority or use its powers to seek information from financial institutions i.e. trust and corporate service providers regulated by the FSC. Under the MoU the requests are assessed on a case-by-case basis. Where a request is urgent a response can be provided over the telephone, facsimile or other electronic means and, if requested, the original signed document should be sent to the requesting competent authority's contact person within five business days.

Unsolicited information

Where one competent authority has information that will assist its sister competent authority, the former may provide such information fully and freely to the extent permitted under the laws and regulations of its jurisdiction even though no formal request was made.

Permissible uses of information

Assistance provided under the MoU will need to be used only for the purpose of enabling the requesting competent authority to exercise its regulatory functions under its domestic law. Any confidential information (identity, assets, liabilities transactions or accounts of a financial institution)that is provided by the requested competent authority to the requesting competent authority shall not be used for any other purpose unless the written consent of the requested competent authority is obtained. Where information is to be shared with third parties, the requesting competent authority would need to seek the consent of the requested competent authority which, if it deems fit, consent in writing to the information being shared with or used by the third party.

Undertaking of inspection visits

A competent authority may be a request to visit a financial institution in the jurisdiction of the requested competent authority where relevant and necessary to fulfil its obligations as the supervisor of a financial institution. The requesting competent authority would need to give at least 30 days notice to the requested competent authority of the time and scope of the inspection and would need to provide the requested competent authority with a list of names of individuals who will conduct the inspection i.e. the inspection team. The requested competent authority has the right to accompany the requesting competent authority on any inspection visit. Before any on-site inspection is commenced the requesting authority will need to discuss the scope of the inspection and any other matters of interest with the FSC at its office and all members of the inspection team will be required to give an undertaking to comply with the confidentiality provisions of the legislation in the BVI.

Confidentiality

The competent authorities will, keep confidential:

Any request for assistance or information pursuant to the MoU

The contents of any requests made pursuant to the MoU

Any information received or provided pursuant to the MoU

Any matter arising during the operation of the MoU, including consultations and unsolicited information

The requesting competent authority shall not provide to any person information provided to it by the requested competent authority unless that person agrees in writing or is legally obligated to maintain the confidentiality of the information. This confidentiality continues even after any competent authority ceases cooperation under the MoU. Where a competent authority is legally compelled by legislation or court order to disclose to a third party, information that has been provided under the MoU, the competent authority should inform the other competent authority indicating what information it is compelled to release. The competent authorities will need to work together to ensure that reasonable steps are taken to protect the confidentiality of the information that is subject to the disclosure.

Click here to download the full text of the MoU from the BVI FSC website.

The initiative, which was the result of work by the Judicial Insolvency Network[1], has proved very popular. The BVI is the latest key commercial jurisdiction to adopt the guidelines this year, joining New York, Delaware, Singapore and Bermuda. It is very likely that others will shortly follow suit.

What do the guidelines seek to achieve?

The guidelines are designed primarily to enhance communication between courts, insolvency representatives and other parties in the context of global restructurings and insolvency. As a result of the increased efficiency, it is hoped that stakeholders will see a reduction in delay and cost.

Key elements of the guidelines are:

Communication between courts

Courts are encouraged to communicate directly with one another. There has traditionally been inconsistency and caution between Judges to communicate, and a question as to its appropriateness. The guidelines actively promote discourse:

Providing for the orderly making of decisions and submissions by the courts

Providing court documents including judgments and orders to another court

Directing legal teams to share documentation with other courts

Concerns that parties might have "behind the scenes" communications are largely addressed by a guideline which provides a default position that parties are entitled to be present during discussions. Communications will be transcribed and form part of the record in the relevant proceedings.

Court appearances

The guidelines provide for foreign parties or appropriate persons to appear before a local court. The standard guidelines provided a safe harbour for appearances in foreign courts without submission to jurisdiction. Importantly in the BVI version, the rules relating to submission are not waived and the normal principles of private international law will apply. Additionally, foreign counsel will be heard according to existing practices.

Acceptance of foreign process

The guidelines provide a "default setting" that foreign laws, regulations and orders have been properly enacted or made. This is designed to streamline the unnecessary baggage of additional evidence in confirming the validity of a foreign proceeding. A provision is also included for courts to provide any updates to other courts involved in parallel proceedings.

Joint hearings

Perhaps the most ambitious aspect of the guidelines is the provision for joint hearings. An annex to the guidelines predicts contemporaneous hearings via video with the ability for counsel to be heard and make submissions in the parallel proceedings court. Unlike the safe harbour provided for those appearing in a domestic court, consideration will be given as to whether a party appearing in a joint hearing will have submitted to the other jurisdiction.

The courts will also have greater autonomy to communicate with one another to establish procedure for joint hearings and subsequent issues without the attendance of counsel.

In practice

Where the guidelines are to be implemented, they should be carried out by way of either an agreed protocol or, if required, by court order. It is likely that existing legislative frameworks, with or without adoption of the model law on cross-border insolvency, will support the guidelines. As a Judge-led initiative, we can expect to see adoption of the guidelines (which are a template only and can be tailored per jurisdiction) via practice direction or commercial guides rather than secondary legislation.

Commentary

The guidelines are deliberately flexible and without transgression to local laws and sovereignty. They are however reflective of the judiciary's desire to enhance coordination and cooperation, in a manner that will streamline proceedings for the benefit of stakeholders. For example, the first guideline encourages practitioners from the outset of proceedings to communicate and cooperate with their foreign counterparts.

Whilst the guidelines may not end turf wars between appointees, they are likely to bring such disputes before the courts at an earlier stage and that alone may well promote the culture of cooperation envisaged by the drafters.

[1] The Judicial Insolvency Network last met in 2016 in Singapore. Judges participating at the Singapore Conference hailed from Australia (Federal Court and New South Wales), the British Virgin Islands, Canada (Ontario), the Cayman Islands, England & Wales, Hong Kong SAR (as an observer), Singapore and the United States of America (Delaware and Southern District of New York).

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BVI Court protects basic rights of persons subject to tax investigations
Thu, 04 May 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-court-protects-basic-rights-of-persons-subject-to-tax-investigations/
http://www.harneys.com/insights/bvi-court-protects-basic-rights-of-persons-subject-to-tax-investigations/
The recent case of Quiver Inc. & Friar Tuck Limited v International Tax Authority in the BVI Administrative Division of the High Court has confirmed that public bodies must strike a balance when discharging their international obligations in the mutual exchange of information by ensuring that procedural fairness safeguards for BVI persons are observed in the performance of those obligations.

This case, decided in March 2017, represents a fundamental protection for those who invest in or hold interests in the BVI. The decision demonstrates the importance the BVI courts attach to the Rule of Law by delicately balancing the Territory’s international obligations under tax information exchange agreements (TIEAs) with the need to appropriately protect the rights of those who live or invest in the BVI.

The development of TIEAs globally

TIEAs seek to enhance cooperation between states by exchanging information and documentation in tax matters in accordance with OECD principles. In practice they provide for ‘on-request’ exchange of information between tax authorities and are relied upon by a tax authority seeking to obtain further information about a domestic taxpayer which they believe to be held overseas.

The Government of the BVI has succeeded in recent years in signing and implementing 25 bilateral TIEAs with jurisdictions such as China, the UK and the USA.

The TIEA framework in the BVI

In the BVI the International Tax Authority (the ITA) is designated as the competent authority in the BVI for the purposes of the Mutual Legal Assistance (Tax Matters) Act 2003 (the MLAT). The ITA routinely issues notices requiring companies under pain of criminal sanction, to provide extensive and highly sensitive financial information to foreign tax authorities to 'aid in the investigation of tax matters'.

The TIEA mechanism is not an arbitrary power, nevertheless it has become open to abuse in an environment where tax authorities have sought to circumvent procedural safeguards and instead sought information on their tax residents through the TIEA framework.

Indeed at first sight, the BVI TIEA framework in the form of the MLAT is silent in relation to procedural safeguards including judicial scrutiny. The coercive nature of the powers as exercised by the ITA, is compounded by the fact that for many years, the ITA's practice has been to deny a recipient of a notice, basic information as to the underlying request including the requesting state; the nature of the underlying investigation; the identity of the taxpayer involved; the tax period concerned and the foreign tax laws said to be applicable. The ITA relied on the shield of state-to-state secrecy to prevent the disclosure of any information to a recipient of a notice.

We first wrote in October 2016 about TIEAs and the issues of opacity that existed in the BVI domestic regime of coercive disclosure to foreign authorities. Today’s article updates our previous analysis and in particular examines the Court’s ruling in Quiver & Friar Tuck, a decision in which Harneys’ clients were entirely successful in establishing that there is at common law a duty of procedural fairness to which public bodies like the ITA are subject, particularly when exercising functions with a power of compulsion for the purposes of a TIEA notice and request.

Quiver Inc & Friar Tuck Limited

Harneys were instructed in late 2015 to seek leave and if obtained to challenge through Judicial Review the ITA's decisions to issue two BVI companies (the Companies), with notices pursuant to section 5(1) of the MLAT to produce information for the purpose of the BVI complying with a request from another State under a TIEA (the Notices). In these notices, the ITA failed to provide the contents of the Request and in particular the ITA did not disclose the requesting state; the identity of the relevant taxpayer involved, or the tax years under investigation.

Harneys advised the Companies that the ITA's practice of issuing notices without information as to the underlying request denied the basic right of procedural fairness; was unfair; unconstitutional and liable to Judicial Review. Leave to judicially review the Notices was granted in February 2016 and a two-day trial took place in March 2017.

During the trial Harneys successfully argued that procedural fairness requires that if the recipient of a TIEA notice is to have an obligation to comply with a notice, under pain of criminal penalties, they are also entitled to such information that would allow the recipient to challenge its validity where appropriate.

Harneys' legal position was vindicated by Ellis J. who handed down a verbal judgment as follows:

there is at common law a duty of procedural fairness to which public bodies like the ITA are subject, particularly when exercising functions with a power of compulsion

procedural fairness requires that the ITA furnish the Companies with sufficient information to enable them to determine whether the Notices were lawfully issued (and therefore comply) or were unlawful and therefore liable to challenge and susceptible to being quashed

in agreeing with the Companies' submissions, Ellis J. expressly rejected the ITA's argument that the duty of confidentiality to which they are subject prevails over common law rights of procedural fairness

The key point of general principle made by Ellis J. was succinct and unarguable.

Her Ladyship stated plainly that: “The Court finds that procedural fairness demands that the ITA provide a sufficient level and degree of information to enable representations to be made as to the lawfulness of the Notices or indeed the Requests.”

The judgment closely followed long established public law precedent in England and Wales and recent case law from Bermuda.

Ellis J. made an order of mandamus. This is a public law remedy requiring that the ITA disclose to the Companies sufficient material pertaining to the request so as to enable the Companies to perform an assessment of whether or not the request is valid.

Conclusion

Whilst the temptation is to say that the Court’s decision in Quiver & Friar Tuck merely confirms the common law duty of procedural fairness in the BVI, in fact this decision affirms the basic common law principle that statutory requests and notices issued under the MLAT regime are subject to the same principles of fairness as any other decision or act made by a functionary of a public body.

It confirms that a duty of confidentiality cannot and does not (on its own) eclipse the fundamental right of procedural fairness to which BVI persons are entitled. It also most importantly confirms that this fundamental constitutional protection is extended to all BVI companies subject to such requests.

Ellis J. was very alive to the clear line of principle commenting in her judgment at trial that:

“These cases demonstrate that the relevant agencies have for the most part arrived at a full appreciation of the fact that some level of disclosure may be necessary having regard to the particular circumstances of the case and the interests of justice and fairness.”

In practical terms, the decision means that public bodies must disclose to the recipient of a notice, sufficient information about the request to enable the recipient to challenge its validity where appropriate.

As such, the Court has recognised that there are clear and sacrosanct checks and balances to protect BVI persons and their interests. This is an entirely proportionate decision designed to prevent the arbitrary use of executive power in providing information to authorities outside of the jurisdiction.

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New law gives BVI FSC discretion to restrict publication of enforcement actions
Tue, 02 May 2017 00:00:00 +0100
http://www.harneys.com/insights/new-law-gives-bvi-fsc-discretion-to-restrict-publication-of-enforcement-actions/
http://www.harneys.com/insights/new-law-gives-bvi-fsc-discretion-to-restrict-publication-of-enforcement-actions/
The Financial Services Commission Act 2001 was amended by the Financial Services Commission (Amendment) Act 2017 (the Amendment) on 1 May 2017. The key provisions in the Amendment are new sections which relate to the routine publication, on the Financial Services Commission’s (the FSC) website or elsewhere, of fines and penalties levied by the FSC.

The key changes are:

Where the FSC considers that the nature of the breach or offence giving rise to the enforcement action, or type of enforcement action taken, is of such a nature as not to warrant publication of the name of a licensee or other person, the FSC can decide not to publish the name of the licensee or other person on the enforcement page of its website or elsewhere. (Section 37(6A))

The FSC now has the discretion to determine the types of cases where publication of the enforcement may be restricted. (Section 37 (6B))

To the extent the FSC does decide to publish the enforcement action taken against a licensee or other person on the enforcement page of its website, the FSC now has the capability to determine the period within which the publication may remain published; determine that the publication shall remain for an indefinite period; specify the condition(s) that should be satisfied before publication is terminated or removed; or take such other action in relation to the publication as it may consider fit. (Section 37(8))

The Amendment is deemed to have come into force on 1 January 2017.

Harneys understand that in practice the FSC would only apply its discretion to restrict publication where an affected licensee or other person makes an application to it seeking confidentiality of the enforcement action taken. Harneys Regulatory Group is at the forefront of the industry in terms of making representations for firms in front of the FSC.

Should you require any assistance in approaching the FSC for relief in enforcement action matters, please do feel free to contact the authors or your usual Harneys contact.

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Arbitration in the BVI: An introduction
Mon, 24 Apr 2017 00:00:00 +0100
http://www.harneys.com/insights/arbitration-in-the-bvi-an-introduction/
http://www.harneys.com/insights/arbitration-in-the-bvi-an-introduction/
The BVI International Arbitration Centre (IAC) opened on 16 November 2016 and the BVI IAC Rules (the BVI Rules) came into force on the same date giving full force to the Arbitration Act 2013 effective as of 1 October 2014 in the British Virgin Islands (the BVI Act).

The IAC in the BVI is the first centre of its kind in the Caribbean to provide a forum for dispute resolution by way of arbitration. The BVI’s central location between North and South America means that parties with business and other interests in those locations are able to choose a neutral territory in which to resolve their disputes. The IAC also provides a perfect venue for arbitrations involving BVI incorporated companies.

The centre itself provides a modern hi-tech facility in which parties from around the globe can expect international high-class standards in a politically neutral environment. Amongst the facilities provided at the centre are simultaneous language interpretation services, audio and video conferencing facilities and a concierge service. The utility of the facilities is soon to be crystallised by direct non-stop flights between the BVI and Miami.

Signed up members of the IAC Panel grow by the month and includes Mr John Beechey, CBE who is the former President of the International Court of Arbitration of the International Chamber of Commerce and who also forms a member of the board of directors of the IAC and serves as its Chairman.

BVI Arbitration Act 2013

The BVI Act has three main features which are of interest:

It incorporates the UNCITRAL Model Law on International Commercial Arbitration as adopted by the UN Commission which is recognised internationally

The BVI is signatory to the UN Convention on Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as the New York Convention

The option to opt-in to a right of appeal to Court on a question of law arising from the arbitral award

In addition, other useful matters to note about the Act are the arbitral tribunal’s power to consolidate two or more arbitrations in certain circumstances and a party’s ability to apply to Court challenging the arbitral award on the ground of serious irregularity.

UNCITRAL Model Law

The incorporation of the UNCITRAL Model Law (the Model Law) into the BVI Act enshrines well-established international principles. The same may be said of the BVI Rules as they are based on 2010 the UNCITRAL Arbitration Rules (the Rules). The BVI Act and Rules recognise firstly, that the parties are free to choose the terms of the arbitration clause subject to the usual common law rules on validity; and secondly, the parties are able to appoint their preferred number of arbitrators.

The effect of the incorporation of the Model Law is that a number of matters codified in the Model Law apply to the BVI Act. These are: (i) the arbitral tribunal’s ability to rule on jurisdiction further to section 32 (ii) the doctrine of severance or separability under section 32 (iii) the ability to challenge the appointment of or to remove an arbitrator further to section 23 and (iv) the power of the tribunal to grant interim measures under section 33. All of these provisions follow closely the Model Law.

Jurisdiction

Jurisdiction challenges are common in arbitrations so it is important that the arbitral tribunal retains the power to rule on its own jurisdiction in order to avoid unnecessary delay. The tribunal is able to hear any objections with respect to its jurisdiction including in relation to the existence or validity of the arbitration agreement without needing to take the dispute to Court. The jurisdictional power of the arbitral tribunal includes the power to decide whether the tribunal is properly constituted and to decide what matters have been submitted for resolution in accordance with the arbitration agreement.

Severance

The doctrine of severance or separability further to section 32 of the BVI Act gives the arbitral tribunal the power to sever the arbitration clause as a contract separate from the rest of the agreement in which it is contained. Consequently, if the main agreement was never properly formed, or if it exists but subsequently fails or is found to be invalid, this does not inevitably result in a finding of invalidity of the arbitration clause.

Challenge to the appointment of an arbitrator

Sections 23 and 24 of the BVI Act set out that the appointment of an arbitrator may be challenged along with the procedure for doing so. These sections follow the wording of the Model Law. An arbitrator’s appointment may only be challenged where circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence, or where the arbitrator does not possess the qualifications agreed upon by the parties. In the first instance, the parties are free to agree the procedure for the challenge. Failing agreement, the parties have 15 days after becoming aware of the tribunal’s constitution or of the circumstances giving rise to the challenge to send a written statement of the reasons for the challenge to the tribunal. If a challenge is unsuccessful, the challenging party has 30 days from receipt of the notice declining the challenge in which to request the BVI Court to decide on the matter.

Interim measures

Unless otherwise agreed by the parties, the arbitral tribunal has wide powers to grant interim measures. Article 17 of the Model Law is fully adopted by section 33 of the BVI Act and provides that an interim measure is any temporary measure, whether in the form of an award or in another form by which at any time prior to the making of the final award, the arbitral tribunal orders a party to: (a) maintain or restore the status quo pending determination of the dispute (b) take action that would prevent or refrain from taking action that is likely to cause current or imminent harm or prejudice to the arbitral process (c) provide a means of preserving assets out of which a subsequent award may be made or (d) preserve evidence that may be relevant and material to the resolution of the dispute.

The applicant must be able to satisfy the tribunal that if the interim measure is not granted, harm not adequately reparable by damages is likely to result by the applying party, and that such harm substantially outweighs the harm that is likely to result to the party against which the measure is directed. The applicant must also satisfy the Court that there is a reasonable possibility that it will succeed on the merits of the substantive claim.

Section 43 of the BVI Act enables the Court to grant interim measures irrespective of whether the arbitral tribunal is capable of granting the same relief in relation to the same dispute. Whilst arbitrators lack the necessary coercive powers to enforce interim measures, the Court may decline to grant an interim measure on the grounds that the relief being sought is the subject of arbitral proceedings and that the Court considers it appropriate for the measure being sought to be considered by the arbitral tribunal. Parties should therefore consider carefully on which side of the line the interim measure sought is likely to fall before applying either to the arbitral tribunal or to Court.

The BVI Act gives to the Courts jurisdiction to consider applications for interim measures in respect of arbitral proceedings which have been or about to be commenced outside the BVI. In these circumstances, the Court may grant an interim measure if: (1) the arbitral proceedings are capable of giving rise to an arbitral award whether interim or final which is capable of being enforced in the BVI under the BVI Act or any other enactment and (2) the interim measure being sought is of a type or description of interim measure capable of being granted by the BVI Court in relation to arbitral proceedings. A Court ordered interim measure is not subject to appeal.

Enforcement under the New York Convention

The BVI Courts have always been able to enforce foreign New York Convention awards. It is now possible to export BVI arbitral awards to other Convention states. The BVI became a signatory to the New York Convention on 24 February 2014 with effect from 25 May 2014 enabling enforcement of BVI arbitral awards in all other states which are signatories to the New York Convention of which there are currently over 150 members. The steps to enforcement in a Convention state are enshrined in sections 84 to 86 of the BVI Act which state that an action for enforcement in Court must be brought. Alternatively, enforcement may take place by producing to the BVI Court: (1) an authenticated original award or certified copy of the original award (2) the original arbitration agreement or a certified copy of it and (3) if the award is in a language other than English, a certified translation of the award.

Grounds under which the BVI Court may refuse enforcement of a Convention award include incapacity of the parties; lack of validity of the agreement; lack of proper notice of the arbitration to the respondent or inability to present their case; where an issue not contemplated by the arbitration has been dealt with; or where the award is not yet binding on the parties or it has been set aside or suspended.

Enforcement of non-Convention arbitral awards

In respect of non-Convention awards, sections 81 to 83 of the BVI Act set out that the BVI Courts can give leave to enforce an arbitral award in the same manner as a judgment or order of the Court. Where such leave is granted, the Court may enter judgment in the terms as set out in the award. The grounds for refusal of enforcement of a non-Convention award are the same as for Convention awards with an additional ground of any other reason the Court considers just.

Notwithstanding the new statutory framework for the enforcement of arbitral awards in the BVI, for a long time, the BVI Courts have taken a tough stance in its approach to the enforcement of arbitral awards and the Courts have enforced awards wherever possible. For example, the BVI Court held in the case of Vendort Traders v Evrostroy (BVIHCAP 2012/0041) that it is not necessary to obtain a Court order enforcing an arbitration award, or indeed an ordinary judgment before a statutory demand may be presented in reliance on the award.

Opt-in to right to appeal on a question of law

Further to section 89 and Schedule 2 of the BVI Act, there are a number of provisions which the parties to an arbitration agreement may expressly include in the agreement. Arguably, the most important one of these is contained at paragraph 5, Schedule 2, which is the right to appeal the final award to Court on a question of law. An appeal may be brought wither by the agreement of all the parties to the arbitral proceedings, or with the leave of the Court. Leave to appeal will be granted only if the Court is satisfied that (a) the decision of the question of law will substantially affect the rights of one or more parties (b) the question is one which the tribunal was asked to decide and (c) on the basis of the factual findings in the award, (i) the decision of the arbitral tribunal was obviously wrong or (ii) the question is one of general importance and the decision of the tribunal is at least open to serious doubt.

It is important to note that the parties will lose the right to appeal, or to seek leave to appeal if they have agreed to dispense with the requirement to include reasons in the final award.

When hearing an appeal, the Court must decide the question of law which is the subject of the appeal on the basis of the findings of fact made in the final award. On hearing the appeal, the Court may make a number of different types of orders. These are an order: (a) confirming the award (b) varying the award (c) remitting the award to the arbitral tribunal in whole or in part for reconsideration or (d) setting aside the award in whole or in part.

This particular opt-in is of significant importance. Without choosing the right opt-ins, parties may find themselves with limited rights of appeal. The parties will need to give careful consideration in their choice on whether to opt-in to this right depending on how much Court involvement is desired.

Other matters

Section 6 and paragraph 2, Schedule 2 of the BVI Act, if included in the agreement permits the Court to consolidate arbitrations in two or more arbitral proceedings if it appears to the Court that there is a common question of law or fact in the arbitral proceedings and that the relief sought in those proceedings are in respect of, or arise out of the same transaction or series of transactions. The Court has a residual power to consolidate arbitral proceedings for any other reason it considers desirable to make an order.

Further to paragraph 4 of Schedule 2 of the BVI Act, a party to the arbitral proceedings may apply to Court challenging the award on the ground of serious irregularity which has affected the tribunal, the proceedings or the award. Serious irregularity has a wide definition, and includes a failure by the tribunal to treat the parties with equality, failure on the part of the tribunal to: (a) remain independent (b) act fairly and impartially as between the parties giving them a reasonable opportunity to present their case or (c) use procedures that are appropriate to the case, avoiding unnecessary delay or expense.

Conclusions

The BVI is a new entrant to the arbitration market. Notwithstanding this, the Act and Rules draw on the well-established UNCITRAL Model Law, the 2010 UNCITRAL Rules and the jurisdiction is a signatory to the New York Convention on the Recognition and Enforcement of Awards. The Commercial Court which is located moments away from the IAC is an internationally respected Court and is arbitration friendly. The opening of the IAC is an extremely exciting development for the BVI and for dispute resolution by way of arbitration. The physical location of the BVI makes it a first class choice for the seat of an arbitration as it is accessible to clients from South America, the USA, Canada and other parts of the Caribbean.

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BVI enacts minimum compulsory retirement age
Fri, 21 Apr 2017 00:00:00 +0100
http://www.harneys.com/insights/bvi-enacts-minimum-compulsory-retirement-age/
http://www.harneys.com/insights/bvi-enacts-minimum-compulsory-retirement-age/
The Government of the British Virgin Islands has recently enacted legislation setting a minimum compulsory retirement age for employment law purposes, subject to certain exceptions. This is the first such measure in the Territory’s history.

The Virgin Islands Retirement Age Act 2016 prohibits employers from retiring on the ground of age any employee who is below 65 years of age. If a pre-existing employment contract or collective agreement allows employers to do so, it is void to that extent.

The above is subject to the following transitional measures:

Employees who reach 60 years within one year of the commencement of the Act (1 April 2017) may request to retire at that age rather than having to wait until 65.

Employees who are due to retire within six months after the commencement of the Act may request to continue their employment.

This Act is also binding on the Crown, and accordingly, BVI government employees are also covered, except if they are Police Inspectors, subordinate Police Officers or Police Constables. If they are, the Governor may retire them at 55 or, if they pass the necessary physical exam, continue their employment for a further period not exceeding five years.

Harneys advises on wide range of employment law matters in the British Virgin Islands. If you have questions on this measure or other employment matters please contact Sheila George, Johann Henry or your usual Harneys contact.